KEY POINTS:
New Zealand has enjoyed almost continuous economic growth for the past nine years. The current economic cycle is now the longest and strongest in about 60 years, according to the Reserve Bank.
Having said that, the strong growth has seen several big imbalances develop such as the buoyant
housing market, a tight labour market, the incredibly high level of the New Zealand dollar and a surge of imports. The result has been a rapid increase in the account deficit.
There are a lot of real strong positives for the New Zealand economy, however, says ANZ chief economist, Cameron Bagrie. "Tourism is New Zealand's biggest industry and it's increasingly integrated with Asia.
"We've got coal coming out our ears, and prices are going through the roof, and we've got a large exclusive sea zone.
"We've got a rapidly advancing high tech industry," he adds.
With rising prices for commodities like dairy products thanks to powerful growth from Asia, New Zealand is currently being presented with the "opportunity of a lifetime", says Bagrie but he is afraid it is going to "muck it up".
Three things are holding us back, he says. Firstly, inflation, (currently about 3.5 per cent). Secondly, we have a very high current income deficit - in other words, we spend too much.
"We can't continue to borrow and spend our way to growth - at some stage we have got to pay our way.
"Thirdly, it's the productivity story. If we don't turn that productivity around, NZ will not be able to take these opportunities being presented," says the economist.
New Zealand has weak productivity growth across the board particularly in construction, retail and business services, he says. The productivity figures at the moment are 1.3 per cent, half of what they were in the 1990s, he says. An example of weak productivity is when you see a lot of salespeople on the shopfloor not selling at their peak.
"New Zealand is an expensive place to live but companies can't afford to pay more unless there is strong productivity growth," says Bagrie. A massive increase in regulation in the past six or seven years making it very tough for business is partly to blame, he says.
The Resources Management Act is at the top of the list, charged by many for slowing down the construction process. There's also been an element of complacency, he says.
The Reserve Bank is taking the situation seriously and has monitored a sharp decline in 2004 to 2006. It is unusual for this to happen when there is strong economic expansion and heavy capital investment, it says but there has been a pick up recently.
Meanwhile, New Zealand, always a delicate economy influenced by other larger economies, can't help but be affected by various global economic developments, namely the credit squeeze caused by the sub-prime situation in the States.
At the same time New Zealand is undoubtedly experiencing a slowing economy.
"We are definitely in a slowdown," says Bagrie. "The economic picture for the next two years is not flash but you need to step back and look at the big picture," says the economist.
