Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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Productivity is defined as the value of productive effort or, technically, as the rate of output per unit of input. The more productive we are, the wealthier we become as we generate more from the same or less units of input.

Productivity, or lack of, is an issue around much of the world. New Zealand’s productivity as measured by real gross-domestic-product (GDP) per hour worked has been slipping compared to the average of the major advanced economies (G7 being Canada, France, Germany, Italy, Japan, United Kingdom and the United States), for the last 50 years.

On this measure, New Zealand’s real GDP per hour worked was less than 70% of the G7 average in 2016, compared to a par performance in 1970. The reasons are probably many and varied, but being a sparsely populated country with duplication in many areas (transport hubs, healthcare, local authorities) doesn’t help. New Zealand is also less industrialised than many other developed economies, with primary industries and the service sector still quite labour-intensive.

Many countries are going to have to produce more with less in the future. Public policy can ensure the quality of its population is as high as possible (education initiatives and higher skilled immigrants), while at the same time being fiscally smart to ensure real interest rates and the real exchange rate remain as low and competitive as possible.

For the rest of us, technology can lead the way to higher productivity. The cost and time required to access and share information is declining rapidly (email and Google versus postal letter and encyclopaedia). The cost to transport goods and move people from A to B has dropped substantially over the past two decades and looking forward, autonomous vehicles and delivery drones will reduce the cost of transport even further. On-line communication and smart technology (“the cloud”) is allowing many people to work from remote areas, partially reversing the urbanisation trend that has dominated demographics over the past several decades.

You can now get a tertiary qualification on-line. Ensuring the provision of and access to digital learning seems a more cost-effective and productive education experience than expanding and building large tertiary institutions. The health sector is embracing technology at the operating and diagnostic levels, but the administration, record-sharing and monitoring of patients seems ripe for innovation, all of which should allow us to do more with less.

Reduced cost of transportation, time savings from less commuting, fewer scale and density constraints on businesses and advances in technology lowering costs in manufacturing and services (robotics), will allow many businesses to deliver economic output on a smaller scale.

We have a Productivity Commission in New Zealand that is tasked with providing advice to the Government on improving productivity in a way that is directed to the overall well-being of New Zealanders, having regard to the wide range of community interests. The Commission has been in existence for nearly seven years, so the recommendations provided are either being ignored or are poorly targeted. Government policy can incentivise (carrot) or penalise (stick), with taxes being the usual stick.

The coalition Government has established a tax working group with the objective to “examine further improvements in the structure, fairness and balance of the tax system”. It seems highly unlikely that the working group will come up with recommendations to reduce taxes.

Yet arguably, lower taxes could be beneficial to both businesses and workers and help boost productivity. Unfortunately increasing the tax burden for companies reduces cash available to invest in capital and innovative changes. It also limits the resources available to pay additional workers and/or pay increases for existing staff. In effect, higher taxes are partly paid for by workers, as businesses have less money for payrolls. For a business owner who cannot maintain profit margins as liabilities increase, capital investment becomes constrained. Some would argue the forces of market competition and regulatory imposition should ensure companies innovate or die, no matter what the level of tax they have to pay. But whatever the cause, the higher the costs, the less that is available to remunerate staff and invest back into the business.

Working-age populations are set to decline along with general population numbers in much of the world in coming years. This includes Asia (excluding India), Europe and Latin America. China’s working-age population (15-64 years) peaked at a record high of 1.02 billion during 2014 and is projected to fall to 815 million by 2050. Europe’s working-age population peaked at a record 503 million during 2010 and is expected to decline to 361 million by the end of this century.

To reverse the decline in productivity, applying the old carrot and stick approach needs to be re-thought. The world is rapidly changing, and policy makers and businesses will need to work together, embracing change, being forward thinking and innovative in solutions while anticipating future challenges. All policies should be benchmarked against wealth creation, not market share.

Kevin Stirrat
Head of Investment Strategy

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