Poor productivity is making it harder for the New Zealand economy to shake off an international slowdown, says Infometrics economist Gareth Kiernan.

Infometrics' latest report picks New Zealand's GDP growth to hold at close to three per cent this year but to trail off through 2020 and dip below two per cent in 2021.

Kiernan highlights the slowdown of the Chinese economy as one cause of the sluggish domestic outlook.

"New Zealand is at the mercy of international economic trends more than at any time since 2011," Kiernan says. "This pressure from offshore coincides with a slowdown in many of the drivers that have buoyed domestic growth over recent years."

Advertisement

He notes that net migration numbers - which have underpinned strong GDP growth for almost a decade - are falling.

But the number one issue for the economy was that it was hitting capacity constraints.

We were effectively paying the price for a poor track record on productivity.

"Labour productivity has increased by an average of just 0.1 per cent per annum since 2013, which is the worst five-year performance since at least the early 1990s," he said.

"With the unemployment rate now at 3.9 per cent, the shrinking pool of available labour is making it increasingly hard for businesses to grow to meet demand."

On top of that the sharp drop in business confidence since late 2017 had made firms reluctant to commit to capital investment.

"It's difficult to comprehend why New Zealand's productivity growth has been so poor," he said.

"The lacklustre performance could partly be a result of the fastest employment growth
being concentrated in lower-skilled industries such as tourism-related services and
construction, thereby dragging down productivity at an economy-wide level."

But businesses should take advantage of the current conditions to invest more, he said.

"Low interest rates, difficulties in finding staff, and the trend towards automation all suggest businesses should be undertaking more investment," Kiernan said.

"Caution is understandable given current concerns about the global economic outlook, but the current lack of investment threatens to limit New Zealand's future potential for growth."

Kiernan said he couldn't see any obvious quick fix to the slowdown in the economic performance.

The Government had a bit of fiscal room, although not much, given self-imposed budget constraints.

Broader Government initiatives to deal with productivity - around education, training and tax incentives - were going to take some time to work.

"Those are the sort of things you invest in but they might take five, 10 or 15 years to actually make a real difference."

Given the international pressures I wouldn't say there's a lot the Government can do.