A big contrast between the US and NZ

December 6

The storm clouds continue to grow for the US economy in the form of a severe housing slump, a developing credit crunch, high oil prices and a weak US dollar.  However, overnight the latest quarterly result was released for a key positive economic factor that has helped underpin the expansion of the US economy over the past few decades – worker productivity.

While not a headline grabbing indicator it is a crucial factor to ensure that an economy can grow without inflation fears from rising wage pressures.   Worker productivity has been rising steadily in the US over the years, even with low unemployment levels. 

This trend seems to be continuing with the overnight announcement from the US Labor Department that worker productivity jumped at a revised annual rate of 6.3% for the third calendar quarter.  This is well above usual levels and the best quarterly rate since mid-2003.  Also announced was a fall in wage pressures with unit labour costs actually dropping at an annual rate of 2%. 

Both these outcomes were much better than expected and it gives the Federal Reserve more scope to keep interest rates lower for longer. This could be crucial in keeping the US economy above water given the many negative factors influencing it at present.

The contrast could not be more stark with our economy, where productivity improvements have been very low by international standards.  The New Zealand Reserve Bank (RBNZ) would love to see US-type productivity figures produced in this country but this seems a forlorn hope at present.  This is confirmed in the table below with US average annual productivity growth over the past five years being almost three times that of New Zealand. 

Given this data there is much less scope for the RBNZ to keep rates low and this is one of the banes of our economy.  Until this particular issue is overcome we may continue to be consigned to higher interest rates than our US counterparts. This seemed to be confirmed with the RBNZ’s monetary policy release this morning, which had a very hawkish tone given the potentially fragile state of our economy. 

Historic Calendar Year Annual Productivity Growth Rates*

Year	United States	New Zealand
2002	2.9%	1.7%
2003	3.0%	1.3%
2004	2.4%	-0.5%
2005	1.6%	0.2%
2006	1.0%	1.1%

Average annual growth rate 2.2%    0.8%
*Source: OECD        
Anthony Quirk 6/12/07