Saving: New Zealand and Australia compared

In a post earlier this week looking at national saving rates across the OECD, I included this chart

net savings aus nz

For the last few years, national saving rates in New Zealand have been higher than those in Australia.  That isn’t the popular perception, and it hasn’t been common in the past –  although for now, the gaps are no larger or more persistent than those recorded for a few years in the 00s.

Before digging behind the numbers, at least a bit, a reminder:

  • these are flow saving rates we are looking at here (the share of the year’s net income accruing to residents of the country in question that is not consumed).   In the case of business savings, the concept is akin to retained earnings from the profits for the year in question
  • I am not looking at stock measures of accumulated wealth, financial assets or anything of the sort.

We can break down these saving rates for each country and see what has been happening in each of the broad sectors: households, governments, and business.   All the charts below are expressed as a share of NNI (rather than of the income of that particular sector).  In each of the charts below, New Zealand data are for March years and Australian data for June years.

First, lets have a look at general government savings

govt s

Every year but one the government savings rate (share of NNI) in New Zealand has been higher than that in Australia.

And that is so even though, diverting briefly to stock numbers, in every single year for which we have data, general government net financial liabilites (loosely, net debt) is larger, as a share of GDP/NNI, in New Zealand than in Australia.  There are probably two main factors at work: first, the size of government here is larger, as a share of the total economy, than in Australia, and second, New Zealand tends to have a relatively large amount of government investment (GFCF) as a share of GDP.

What about households?

Probably to no one’s surprise

household s 2.png

In all but one year, household (net) saving in Australia has been higher, as a per cent of NNI, than that in New Zealand.  The size of the gap between the two series hasn’t changed much over time, and there is little sign that the gap now is consistently larger than it was 30 years ago before the compulsory private savings scheme was introduced in Australia.  Both countries have had fairly rapid rates of population growth over these decades –  although the growth has been concentrated in different periods.  Over long periods of time, you’d expect a country with rapid population growth to have a higher household savings rate than one that doesn’t.   What is, perhaps, interesting about the Australian series is how far the household savings rate has dropped back again in the last few years.

And what about the business saving rate?  In aggregate the picture looks like this

business s.png

For the first decade or so of the data things are much as you’d expect.  Business saving in Australia averaged a bit higher than that in New Zealand, consistent with the fact that business investment rates tend to be higher (partly reflecting the Australian economy concentrating in quite capital intensive sector).  You can, loosely, see some cyclical effects: profits tend to fall away quite sharply in recessions and so, typically, will business savings rates.

But once one gets to this century things become harder to make sense of.  And the Australia numbers seem easier to make sense of than the New Zealand ones: in Australia as the terms of trade surged and huge new mining sector investment opportunities opened up you’d expect firms to be using higher profits and higher retained earnings to finance part of the huge surge in mining investment.  The Australian terms of trade peaked in 2011 and is much lower now.  Mining sector investment is also well past its peak.  Still, I was a bit surprised to see that overall business saving rates are now lower than they were, on average, in the 15 or so years before the terms of trade boom.

But what of New Zealand?  Why did business saving rates surge at the very start of the 00s, and then fall away so sharply –  the amplitude of that fluctuation is larger than for Australia more recently.  Some of it probably had to do with the exchange rate –  which reached a deep trough in 2000 at a time when commodity prices were high.  But it doesn’t really seem like a sufficient explanation.  And that trough was in the year to March 2007, more than a year before the recession really hit.

Despite my inclinations to look on the gloomy side, I’d almost be inclined to think positively about the recent rise in business savings rates –  higher now than they were at any other time in the 1990s –  except that there is little or no sign that these higher saving rates reflect any sense of an abundance of investment opportunities.  Business saving rates in New Zealand may well now be being boosted by the pressure on dairy farmers to use whatever earnings they can generate to pay down debt.

We can use official data to look a little further behind the business saving story, splitting the business saving rate into financial businesses and other businesses. I’m not sure why one would want to –  they are all businesses after all – but as it happened there are some interesting, but puzzling, differences uncovered by doing so.  Note that for New Zealand the data are not yet available for the March 2019 year.  And the New Zealand data are available only for the last 20 years.

Here is financial sector (net) saving

fin.png

and here is the non-financial business sector

non-fin.png

I just don’t know what to make of the earlier years: why would NZ financial sector saving (retained earnings) be so much lower than that in Australia, at precisely the same time non-financial sector business saving was materially higher.  Something doesn’t look quite right (but perhaps it is, and I’d be happy to have any authoritative explanations).

More recently, this decade, the financial sector savings rates have been very similar on both sides of the Tasman: rather what one might expect given that the biggest players here (banks) are also big Australian banks.  But if that is plausible and roughly right, it leaves the business saving rate in the rest of the business sector quite a bit higher here than in Australia.   Which is interesting, and not necessarily what I would have guessed without checking.

I don’t purport to have any particular insights to offer on quite what has been going on.   Digging any deeper would probably require more resources and data that I don’t have.  But it is interesting that the relationship between New Zealand government savings and Australian government saving, and New Zealand and Australian household saving, have been pretty stable for a long time.  The puzzles seem to rest in the business sector data, and unfortunately business saving is quite routinely overlooked when people talk,or think, about saving behaviour in New Zealand.   A Treasury, Reserve Bank or Productivity Commission note might be able to shed more light on developments that we probably should understand better than (at very least) I do.

 

Savings rate across the OECD

In my post yesterday I looked at various New Zealand saving and spending series across time, drawing from the recently-released annual national accounts data.  In this post I’m looking just at national savings rates, but across the spectrum of advanced countries, as proxied by membership of the OECD.

Savings rates have been a hardy perennial in discussions of New Zealand macro data and economic performance for a long time.   It is perhaps in the nature of the case given that for much of its modern history, New Zealand has drawn fairly heavily on foreign savings (and thus has typically had quite a large negative net international investment position).  For much of our more recent (say, post-war) history, economic performance –  proxied by productivity or per capita income measures –  has also disappointed.

The stylised facts were that, by comparison with other advanced countries, our national savings rates tended to be fairly low.     Quite why wasn’t  –  perhaps isn’t – lways clear.   For most of the post-war period –  the 70s and 80s were the exception –  the government’s accounts tended to be fairly well-managed.  And although the tax treatment of household savings tends now to be quite hostile –  under the guise of (a false conception of) neutrality –  it wasn’t always so (until the changes at the end of the 1980s).

In this post, I’m concentrating on the same indicator of national savings I used in yesterday’s post: net savings as a percentage of net national income.  In other words, provisions for depreciation don’t count as saving (they aren’t available to build the capital stock, only to maintain it), and the relevant income measure is the income available to New Zealand residents after providing for depreciation. In other words, the income available to consume or to build the capital stock.

In the paper a few years ago in which I first tried to document and articulate my story around New Zealand’s economic underperformance I included a chart showing that in the early 1970s (when comparable international data date back to), New Zealand had had the sixth lowest national savings rate of the OECD countries for which data were available.    Here is a version of that sort of chart.

net savings 70 to 74

In many ways, it is quite a startling range, and not just for a single year (which can be influenced by different cyclical factors).

One of the points I made in that earlier paper was that New Zealand didn’t look such an outlier if one focused in on just the Anglo countries –  not just the ones we often compare ourselves too, but also perhaps the countries with the greatest cultural similarities to New Zealand.    In this particular snapshot, we had national savings rates higher than those in the UK, Canada, and the US, while all four countries were materially lower than Australia.

How has that Anglo country comparison unfolded since?

net saving anglo comp

We had national savings rates lower than the other Anglos in the late 70s, but since at least the early 1990s, we’ve never had a national savings rate materially lower than that of the median Anglo country and for two multi-year periods (including the last few years) we’ve been well above that median.

Now, one point I probably didn’t make clearly enough in yesterday’s post is that inflation can distort these numbers, especially for countries with large net international investment positions (particularly large debt positions).   In the presence of inflation, some of the interest paid abroad is recorded as a factor income payment when, in economic substance, it is just a compensation for inflation and thus is, in effect, a repayment of principal.  This is a well-recognised point, highlighted from time to time by agencies such as the Reserve Bank, but there are no official series making the correction.

For New Zealand in the early 80s, most probably our “true” national savings rate was below that in other countries –  there were large government deficits at the time – but at a time of heavy indebtedness and still quite high inflation (most of our debt then was denominated in foreign currency) the gap would be smaller than shown here.

What of the current position?   At present, the UK and Canada have NIIP position near zero, while Australia, New Zealand, and the United States are all around -50 per cent of GDP.     But the US net position is mostly an equity position, reflecting high share prices (foreign holdings thereof).  In the New Zealand case in particular, by contrast net debt is almost equal to (ie in net terms makes up almost all of) the overall net investment position.    With a core inflation rate of perhaps 1.7 per cent, our national savings rate would be perhaps 0.8 percentage points higher again if inflation were accounted for correctly.  But bear in mind that 15 years ago, not only was inflation (and inflation expectations) a bit higher, but that our NIIP position was also more negative (more like 70 per cent of GDP).  The appropriate adjustment then might have been more like 1.5 percentage points.

Bottom line: it is a real issue to keep in mind, but the extent of any adjustment required is less now than at any time since the early 1970s (when inflation was getting up but the NIIP position was small).

What about the simple comparison with Australia?  Australia has often been held up –  especially in New Zealand –  as some bastion of (Anglo) high savings.  Champions of compulsory private savings (as found in Australia) are fond of it, even though those champions will rarely acknowledge that the gap between Australian and New Zealand (net) national savings rates has been smaller in the years since Australia introduced compulsory private savings than it was previously.

So how do the simple New Zealand/Australia comparisons look?

net savings aus nz

There is plenty of variation in the series of course, and you can see (for example) the way the huge surge in Australia’s terms of trade boosted national savings rates up to around 2012.   But having had a net national savings rate averaging well below Australia all the way through to the start of the 1990s, we’ve since had net savings rates that are really rather similar on average.  This century New Zealand averages just slightly lower than Australia, but for the last few years we’ve had a higher net savings rate than Australia.

In fact, of the five Anglo countries, New Zealand currently has the highest net national savings rate.

(Note that these are comparisons of net savings rates –  the share of income available to build the capital stock.   Australia’s mining and resources sector is very capital-intensive and comparisons of gross saving rates –  which include depreciation provisions –  are higher in absolute terms, and Australia’s are higher relative to those in New Zealand.)

And here is the comparison for that whole group of OECD countries for which there was data right through since the early 1970s, this time an average for 2013 to 2017, the most recent five year period for which there is comprehensive data.

net saving 13 to 17

New Zealand in the upper half of the (old) OECD.    Not a chart I really expected to see.

Even if we add in the newer OECD countries and look just at the most recent year’s data

net saving oecd 2018

New Zealand is almost exactly the median country.

Now, personally, I wouldn’t get too excited about this.   When you are among the handful of countries with the fastest trend population growth rates you would expect over time that your country should also have relatively high (net) savings rates (all that capital stock, whether commercial, public, or residential, is typically owned and paid for locally eventually).  And all the countries in the upper quartile of that last chart have modest rates of population growth (or have falling populations –  Estonia).   But it is a somewhat different emphasis than we’ve been used to seeing.

Spending and saving

Another post, probably the last, looking at some of the recently-released national accounts data.

First, a useful reminder of how much, relatively speaking, New Zealand benefited from the fall in interest rates over the last decade.

IIP

The chart shows the share of New Zealand’s GDP (the value of stuff produced here) that accrued to foreigners as returns on their loans to New Zealand residents or their equity investments here.  When the chart starts, in the year to March 1972, the net international investment position (NIIP) was very small, and so were the returns to those who’d provided the funds.   The (negative) NIIP positioned widened a lot over the 1970s and 1980s, and so did the servicing burden.

As recently as just prior to the last significant recession (2008/09) the equivalent of just over 7 per cent of everything produced here accrued (net) to foreign lenders or investors.  That wasn’t wholly a bad thing of course: interest rates were cyclically because the economy was doing relatively well, and when the economy is cyclically strong profits –  to domestic and foreign-owned businesses operating here –  also tend to be high.  One of the big transitions over the 1990s and 2000s was that almost all the net debt owed by New Zealanders abroad was, in effect, in New Zealand dollar terms, thus it was the NZ interest rates which affected the servicing cost.

As late as mid 2008, the OCR was 8.25 per cent.  It was 1.75 per cent in the last year on this chart, and is 1 per cent now.  That shift is the biggest contributor to the reduction in the servicing burden to around 3.5 per cent of GDP now.  It is a significant shift: on average in the 90s and 00s about 94 per cent of what was produced here was available for local uses, these days something like 96.5 per cent is available.  In a decade when productivity and real GDP growth have been pretty lacklustre, it is a saving not to be sniffed at.

I’m not here wanting to imply that the sharp fall in New Zealand (and global) interest rates is a good thing in and of itself.  After all, New Zealand and global interest rates are likely to have fallen so much partly for reasons reflecting a reduction in perceived investment opportunities and a dearth of profitable (risk-adjusted) projects.  But if that reduction has been fairly global in nature, at least all else equal as a country that had taken on a lot of foreign (debt and equity, although in net terms mostly debt) we’ve benefited from the unexpected collapse in servicing costs relative to countries which were net providers of funds to the rest of the world.

It was just one of several things that should have been going for New Zealand.  Not only did the debt we’d taken on prove much cheaper to service than we’d expected, but the terms of trade (prices of stuff sold abroad, relative to the prices of stuff imported) also proved unexpectedly strong.   There were real income gains from those direct effects, but little or none of it seems to have translated into, say, stronger business investment or any narrowing of the productivity gaps between New Zealand and the rest of the world.  But investment was last week’s post.

What about consumption and saving?

Here is net national savings as a percentage of net national income (ie ‘net’= after deduction of depreciation from both sides, and “national income” is domestic product adjusted for net factor income flows accruing abroad –  mainly the investment income shown above).

net savings to nni dec 19

Net saving (from income) of New Zealanders perhaps averages a bit higher than it did over the period from the mid-70s to around 1990 (although in these earlier numbers there are some material inflation distortion), but the current cycle doesn’t look much different than the previous one, despite windfall income boosts discussed above.

The sectoral savings data are available only from 1987 onwards.  Here is the household savings rate,

household S

It has been quite stable for a few years now, although still around zero.     For those convinced that somehow house price inflation is a material part of the household savings story, a reminder that the all-time low in this series was in the year to March 2003, and 2003 was the very first year of the 2000s surge in house price, subsequently built on in further rises in real house prices this decade.

And here are the two components of private savings, this time shown as a share of NNI.

savings per cent of NNI

If (net) business savings are higher than they were (on average) in the first 20 years or so, they are still lower than the peak (year to March 2003 again) seen in the previous growth phase.  Given that business investment has been pretty quiescent, one is left wondering whether, for example, the gap between company and maximum personal tax rates is encouraging owners to save in the corporate entity, rather than taking a distribution and saving personally.

And here is government and private (household plus business), again as a share of NNI.

govt and pte saving dec 19

There is, pretty clearly, some element of offset in these two series –  which makes some sense; when the government is running big surpluses, households in particular may not need to be quite as cautious –  but that story shouldn’t be overstated.   After all, the overall rate of private savings has been remarkably stable all decade, even as government saving was gradually getting back to more normal levels.  Private savings rates do seem to have been averaging higher than they were in the 15 or so years prior to the last recession.

And on the other side, what about consumption?

C NNI

We consume more than 90 per cent of what we (New Zealand residents, including resident companies) earn.  But, if anything, that share seems to have been falling a little; in particular, last year private consumption as a share of NNI was the lowest in the 30+ year history of the series.  So much for those stories about people consuming on the back of high/rising house prices: I’m sure it happens for a few people, but for the economy as a whole (where an increasing number of people can’t buy a home at all) it isn’t a thing, and that isn’t surprising because higher house prices don’t make us better off in aggregate.

And what about government consumption?  There are two different types of consumption here: individual consumption (things government pays for but you consume directly, such as schooling and hospital services) and collective consumption (defence, law and order, and all those officials in Wellington head offices).  Both measures, of course, exclude transfer payments (eg welfare benefits) to households.

govt C dec 19.png

Focus on the blue line first.  Despite the rhetoric from each side in politics, government consumption spending (as a share of income) hasn’t changed much in 30+ years, and the bigger changes look to be mostly cyclical in nature.  Thus, Ruth Richardson and Jim Bolger weren’t greatly increasing government spending in the early 1990s; instead, there was a recession and government consumption spending tends to hold quite steady.   Similarly, the last Labour government wasn’t slashing spending (the low point on the blue line is 2004), but the economy was quite cyclically strong and terms of trade were turning up.  And so on.

But the orange line did catch my eye.  Whereas in the late 1980s governments were spending almost 10 per cent of GDP on collective consumption –  things more akin to public goods – now that share is only about 8 per cent.    There will be all sorts of things going on inside that aggregate, and there may have been some reasonably material genuine efficiencies garnered over time, but….. I can’t help wondering if this number isn’t a little low.  It is easy to highlight a lot of silly, pointless (except as something like virtue signalling) public agencies, which could quite readily be eliminated, but most of them are pretty small, often very small indeed.  The amounts involved are also small.  But look, for example, at the state of our national statistics –  including the debacle of the last census –  and you have to wonder.  As even my fairly dry right-wing friends on the 2025 Taskforce noted a decade ago, things governments actually need to do need to be done well, and that involves spending money.

Then again, perhaps that is simply a Wellington perspective, born of mixing with public servants.

(It is perhaps worth noting in passing that when she made her schools spending annoucement yesterday, every second word from the Prime Minister seemed to be “investment” (or “infrastructure”).  No doubt much of the extra spending will manage to be categorised as capital spending for government accounting purposes, and perhaps even as investment for national accounts purposes, but spending that doesn’t generate a return –  in some form or another –  is really just consumption, and interest rates can be as low as you like – typically for reasons having to do with a dearth of remunerative opportunities –  but consumption spending still has a substantial cost (100 per cent of it) relative to which the interest costs are pretty second order.)    Businesses undertake stuff categorised as “investment” with the intent (not always realised) of generating an economic return.  Governments can often be less disciplined, motivated by different considerations, not excluding re-election.)

Savings and investment

Pottering in the IMF WEO database yesterday, I found myself looking at savings and investment trends.  Here is chart for advanced countries as a group, with the data expressed as a percentage of GDP.

adv country savings and investment

In some ways, it is quite a remarkable chart –  remarkable for what isn’t there.  Over the entire period I’ve shown –  2000 to (estimates for) 2018 – the gap between the aggregate savings rate and the aggregate investment rate has only twice exceeded 1 per cent of GDP.    The measures for the world as a whole –  where savings and investment have to equal each other, if correctly measured –  isn’t much less variable.  It is almost as if the advanced world countries just trade with and borrow from or lend to each other.   For what it’s worth, both investment and savings rates –  the former specially –  are now lower than they were in 2007.   That probably isn’t too surprising, given demographic trends and weak productivity growth.

And, of course, the aggregate chart covers a huge amount of variation in individual country experiences.   2007 was the peak of the last boom.   Here is a chart, by country, of the change in the gap between savings and investment rates from 2007 to 2018.

chg in s and i

Broadly speaking, current account deficits and surpluses have narrowed in advanced countries (eg Singapore’s surplus has shrunk a lot, and Latvia’s deficits have shrunk).  But, as the first chart shows, almost all that adjustment looks to have occurred within the advanced country grouping.  As it happens, New Zealand is the median country on this chart.

Of course, it isn’t so different in the rest of the world taken together –  the IMF’s class of emerging markets and developing countries.  Here is the aggregate savings and investment chart for that large group of countries.

s and i emerging

There was a big increase in both savings and investment shares in the 2000s, and if anything the aggregate investment share –  already far higher than in the advanced world –  still appears to have been trending upwards more recently.    (The picture isn’t much different if one simply looks at Asia –  often the focus of discussions about big imbalances.)

In the emerging/deveoping country group, there has been a bit more variability in the gap between savings and investment rates –  or at least there was in the peak boom years prior to 2008 –  but both at the start of the period and at the end, just like advanced countries as a group, emerging and developing countries as a group are basically financing all their own investment.  Again, there is huge variability in individual countries’ experiences –  China comes to mind, but so too do places like Argentina and Turkey.  But in aggregate –  and despite all the talk –  the advanced world finances itself and the emerging/developing world does the same.

I’m sure there are learned articles around on this issue (which I don’t have time today to try to track down) but it isn’t at all what (very) simple theory would have predicted.  There isn’t any simple obvious reason why savings and investment patterns should have tracked so closely within these aggregate groupings of countries, and yet not between individual countries.  It wasn’t, for example, how things were between the advanced and emerging economies in the late 19th century.  But it has been for the last couple of decades, and IMF projections don’t suggest they expect any change in the next five years.

I might try to dig out some articles addressing the issue, give it some more thought, and perhaps write another post down the track trying to better understand this pattern.

Savings rates in international context

In putting together yesterday’s post, I stumbled on something I hadn’t noticed previously.  In yesterday’s post I showed only New Zealand saving rates –  in particular, net national savings (ie savings of New Zealand resident entities, after allowing for depreciation) as a share of net national income.  The net national savings rate has picked up quite a bit in the last few years, although not to historically exceptional levels.

But here are the New Zealand and Australian net national savings rates plotted on the same chart.

net nat savings nz and aus

For the last couple of years, the net savings rate of New Zealanders has been higher than that of Australians.  I wouldn’t want to make very much of a couple of years data, and over, say, the last 25 years, the average savings rate of New Zealanders has still been a little lower than that of Australians.  But even that average gap has been much smaller over that period than over, say, the previous 20 years.

It isn’t a story you would typically hear from those who argue that savings behaviour is at the heart of New Zealand’s economic challenges.   Some will point to the compulsory private savings system now in place in Australia (phased in from 1992).  There is no easy way of assessing the counterfactual –  what if the system had never been introduced? –  but there is no obvious sign that the system has led to a lift in national savings rates in Australia, whether absolutely or relative to New Zealand.  Others will (rightly) highlight the big tax changes implemented here in the late 1980s which materially increased the tax burden on income earned by savers (in a way pretty inconsistent with the recommendations of a lot of economic theory).  I don’t think those changes were appropriate, or even fair, and would favour a less onerous regime.  But in the decades since the changes were made, our savings rates have been closer to those in Australia (where a less onerous tax regime applies as well) than they were in the earlier decades.

One policy change that may have made a difference is overall fiscal policy: the improvement in New Zealand’s overall fiscal position (reduction in general government debt) has been larger than that in Australia (largely reflecting the fact that we were in a bigger fiscal hole 25 or 30 years ago).   Higher average rates of public saving may have lifted average national savings rates to some extent.

What about other countries.  In a paper I wrote some years ago for a Reserve Bank/Treasury conference, I illustrated that over time New Zealand’s savings rate hadn’t been much different from that of some other Anglo countries.  Here is a more recent version of that sort of chart.

net nat savings anglo

New Zealand’s national savings rates have typically been below those in the OECD group of advanced countries as a whole (and perhaps particularly some of the more economically successful of those countries –  whether by chance, cause, or effect).   But even on that score the last few years look a little different.   This chart compares New Zealand against the median of the 22 OECD countries for which there is consistent data over the full period.

net national savings oecd

It is quite a striking change, and the reasons aren’t at all clear (see yesterday’s post on the puzzles around the New Zealand data).  Perhaps in time some of the rise in the New Zealand savings rate will end up being revised away.  Perhaps the lift will prove real, but temporary (as, say, happened for a few years around 2000). But if not, the apparent change in the relationship between our savings rate and those in other advanced countries should help keep our real interest rates –  and our real exchange rate –  a bit lower than otherwise.  If sustained, that would be expected to lift our economic prospects a bit, all else equal.

But it is worth remembering that, all else equal, a country with materially faster population growth than its peers should typically expect to have a higher national savings rate over time than its peers.   All else is never equal of course, but New Zealand continues to have a population growth rate well above that of the median advanced country.

 

 

New Zealand savings rate trends

Making sense of savings behaviour (the bit of flow income not spent) in New Zealand is a bit of a challenge.  Perhaps that is true of other countries as well, but I know their individual stories less well.  In the New Zealand case, it isn’t helped by the rather limited historical data: we have an official estimate of national savings back only as far as the year to March 1972, we only have a sectoral decomposition of savings (household government, etc) back to 1987, and there is no official quarterly data.  Australia, by contrast, has all this data back as far as 1959.

Our sustained period of high inflation didn’t help either.   A significant chunk of any interest rate is typically compensation for inflation, and on the other hand in inflationary periods depreciation (typically on a historic cost basis) tends to be understated.  Decades ago, the Reserve Bank was pointing out that in that era, inflation was flattering our national savings figures.

Here is the official series of net national savings expressed as a percentage of net national income (“net” in both cases being net of depreciation – or “consumption of fixed capital”, and “national” referring to the income and savings of New Zealand residents, as distinct from “domestic” –  as in GDP  –  being any activity occurring in New Zealand.)

net savings to nni jan 18

If your eye is anything like mine, you are probably drawn to those last few observations, suggesting quite a significant increase in the net national savings rate in the last few years.    It isn’t exceptional by historical standards –  the savings rate averaged just a little higher for several years in the early 2000s –  but is interesting nonetheless.   Of the other potentially interesting observations, I have no good story for why national savings rates were so much higher at the very start of the period (and thus can only lament the absence of a longer run of official data).   One thing is clear: the lowest points in the series (years to March 1992 and March 2009) coincide with severe recessions.   That probably isn’t too surprising.   But there isn’t anything really comparable on the other side: if savings rates have tended to be higher in cyclically stronger periods, the peaks certainly don’t coincide very strongly with cyclical economic peaks.   Perhaps the other thing to note is that for the last 40 years there has been no obvious trend in the series: fluctuations have been around a fairly constant average rate of 5 to 6 per cent.    Perhaps the reduction in the inflation rate masks an underlying modest trend improvement, but even if so, the high inflation era itself ended 25 years ago.

What about the sectoral breakdown of net national savings?   Here is the split between government and private savings.

savings rate jan 18

It is pretty well-recognised that there has been an inverse relationship between the two series.  Quite what that means, or why it occurs, is another question.    Some of it is about the automatic stabilisers built into the tax system (in particular).   Government tax revenue tends to increase more than proportionally in economic upswings, and vice versa (eg on the company tax side, many companies record losses in recession, and it may take a few years of a recovery before they start having a tax payment liability again).      Some may be about government spending taking the place of private spending: if the government suddenly starts paying for, say, childcare costs, households no longer have to and some of that money might now be saved.    Some might be about rational expectations of future fiscal adjustments –  not in some very long-term Ricardian sense, but just that political debate tends to compete to spend large surpluses when they do arise, and people may anticipate that they will soon have more money in their pockets (eg from tax cuts).   Whatever the reason, the pattern has been there over the last 30 years or so.  It is one reason to be a little cautious about the idea sometimes heard that, if raising national savings rates was some sort of national economic priority, it might be enabled by governments simply running larger surpluses.    History –  here and abroad –  suggests that such surpluses aren’t likely to be sustainable, at least when starting from a low debt position, and that the public will relatively quickly recognise that.

Having said that, it is interesting that over the last few years the increase in the national savings rate has been almost wholly reflected in a rise in government savings.  The private savings rate, by contrast, has been pretty stable for some years.

But what about the breakdown within the private savings rate.  This chart shows household and business savings separately, both as share of NNI.

savings rates jan 18 pte

It is useful to be reminded that for some decades now business (net) savings rates have been quite a bit larger than those of households.  Little commentary ever focuses on business savings rates.

Some commentators –  including, at times, the Reserve Bank –  tend to make quite a lot of the role of house prices in explaining household savings behaviour.   I’ve never really found that convincing, and suspect that fiscal policy may be more important an influence on the cyclical swings in the savings rate.  Why?   Well, consumption as a share of GDP has been remarkably stable over 30 years, in the face of huge increases in house prices, and quite substantial swings in house price inflation.   That shouldn’t really be a surprise: after all, higher house prices aren’t a net gain in the community’s real purchasing power, they just redistribute purchasing power a bit (to those just about the downsize and retire to the provinces, and away from those trying to purchase a first home).  And, as it happens, the low point in the household savings rate series came in the year to March 2003, just prior to the first great surge upwards in house prices.

And, of course, one keeps seeing talk –  typically from interested parties –  of the rising tide of Kiwisaver funds.  No doubt, there is a big increase in the stock of funds bearing a Kiwisaver label, but there is nothing in household savings data over the last decade that really suggests any material change in households’ overall rates of savings.   Those rates were very low when the government was running big surpluses, picked up somewhat when the government had big deficits (and the economic climate was uncertain) and have been falling off again in recent years as the budget moved back into (actual and prospective) larger surpluses.

As for business savings, I don’t know how to interpret the data at all.  There has been too little analysis (at least that I’ve seen) attempting to make sense of the swings in the years leading up to 2008 –  that really sharp fall in business savings rates well before the recession itself –  or of the extent of the subsequent recovery.    Terms of trade fluctuations, for example, don’t readily explain the patterns.    Of course, in the end  firms are ultimately owned by households, and the boundaries between the two may be somewhat permeable (and affected, for example, by tax changes and dividend distribution policies.)

I’m not one of those who is alarmed by New Zealand savings rates.   They are towards the low side in international comparisons (a topic for another day), but it isn’t obvious that that is because of specific policy distortions here which materially adversely affecting savings (and more so here than in other countries).   The government accounts have been fairly healthy for decades, our welfare and retirement income system discourages private savings less than those of many other countries, and although our tax system bears materially more heavily on institutional savings than the regimes of many other countries, one has to be cautious about putting too much weight on that argument: it is not, after all, as if savings rates have been materially lower since the late 1980s (when the tax system was markedly reoriented) than previously.   A highly successful economy would be likely –  based on international comparisons –  to see higher average savings rates, but that doesn’t mean that policies designed to boost savings rates could themselves do much to lift the performance of the economy (partly because policies designed to “boost savings” don’t themselves have a particularly good track record).   Rather, when firms are finding abundant investment opportunities, they will tend to be wanting to retain more in the business, and earning the rates of return that support those high business savings rates.

As a reminder, this post has been about flow savings rates.  Some people are keen to talk about asset revaluations, and gains in recorded wealth.     That is, largely, a different topic, but –  as already noted –  bearing in mind that we all have to live somewhere, higher house prices do not make us, as a community, better off.   Higher equity prices may well do so –  and thus US research used to find a stronger wealth effect on consumption from equity prices –  especially if those gains are reflecting underlying improvements in productivity etc.

Not bucking the longer-term trends

I was belatedly reading the speech given earlier this month by the Governor of the Reserve Bank.  His speeches often have had a strong tinge of cheerleading for the government –  either highlighting the positive indicators ministers and the former Prime Minister liked to cite, or highlighting as areas for concern only those aspects that the government itself had been raising (thus, for example,doing things about improving housing supply is regularly mentioned, but never the option of cutting back on the medium-term target level of immigration).

This speech was a little different.    The Governor took the opportunity to note that the current recovery –  itself interrupted by a double-dip recession in 2010 –  has been the weakest (in terms of average GDP growth rates) in New Zealand for many decades.  Under a heading “labour productivity growth has been particularly weak”, he explicitly drew attention to the estimate that “New Zealand’s trend rate of labour productivity growth is in the bottom third of OECD countries”, and also noted just how weak growth in total factor productivity growth has been.  The dismal record should be quite a challenge both for the new Prime Minister and Minister of Finance, and for opposition parties thinking about the policy proposals they will campaign on in the next year’s election.

But the paragraph that caught my eye in the Governor’s speech was this one.

New Zealand’s household net savings rate improved by 8 percentage points in the period 2008 to 2013 (from minus 6 percent to positive 2 percent of household disposable income (figure 5)).  Over this period, New Zealand’s overall savings rate (ie including savings by the business and public sectors) increased by around 5 percentage points, and this has been an important factor behind the improvement in New Zealand’s ongoing current account deficit and the decline in net external liabilities as a share of GDP (this ratio has declined from 84 percent of GDP in 2009 to around 63 percent of GDP currently).

It prompted me to go and have a look at the recent annual national accounts data (which will have been released just after the Governor gave his speech).

It was the comment on the overall national savings rate that surprised me.   Here is a chart of the net national savings rate as a share of net national income.

net national savings.png

There has certainly been quite a rebound in the national savings rate since the recessionary trough in the year to March 2008, but it does look mostly cyclical.  The latest observation is around the same level we saw in the year to March 2005.   There isn’t any sign that overall savings rates in New Zealand, averaging across the cycle, are any higher than they have been on average in recent decades.

Here is a shorter span of history for the household savings rate (also as a share of NNI).

household savings.png

The trough in this series was the year to March 2003, just before the big housing boom of the 00s got underway.   There was quite a recovery in the last years of the economic boom and during the recession and immediate aftermath.  But the steady fall in the household savings rate over the last few years also suggests nothing very different from history.    If the current household savings rate is higher than the earlier troughs, at the same time the government savings rate is lower than it was then.

Here is the chart for the same period of government and private savings rates.  “Private” includes –  and is typically dominated by –  business saving.

govt and pte savings.png

For a variety of reasons, when government savings rate rise private savings rates tend to fall, and vice versa.  The really sustained recovery since 2007 has been in business savings –  a component of savings that is typically too little analysed.

The Governor’s comments focused on changes in the savings rate(s).  But the other side of the equation –  particularly as it affects the interpretation of the current account –  is investment.

Here is the long-term chart of investment (national accounts definition –  gross fixed capital formation) as a share of GDP.

gfcf dec 16.png

Again, as I’ve illustrated previously, we’ve had a cyclical rebound in investment rates.  But it isn’t an impressive rebound.  The latest observation –  this in an economy which the Bank thinks has perhaps a small positive output gap – is well below the peaks in 1976 and 1986, and around the same level as the peak in 1996.   The economy went into the 1990s recovery with a massive overhang of commercial property, so it perhaps wasn’t surprising that overall investment didn’t surge to really high levels.  By contrast, in this cycle earthquakes destroyed quite a lot of commercial, residential and government capital stock –  necessitating a lot of gross fixed capital formation just to restore the capital stock to what it was pre-earthquakes.

In many other OECD economies, a gradual decline in the investment share of GDP over time wouldn’t seem odd, as the population growth rates have been trending downwards.  In many cases those countries now have flat or slightly falling populations, and just don’t need as much new investment to maintain capital/output ratios.    But that isn’t the story of New Zealand.  Over the period of that GFCF chart there has been no trend decline in New Zealand’s population growth and in the last year or two, our population has grown as rapidly as at any time since the 1950s.  This chart is a few quarters old, but it illustrates the point.

world-population-growth

I wouldn’t want to make very much of the narrowing in the NIIP position.  Again, the Governor referred to a trough in 2009 and compared it to the current position.  But the NIIP position tends to cycle, and over 25 years there hasn’t been much change in the trend level.

But if anything, one could run a slightly contrarian position that a better-performing New Zealand economy over the last few years –  one where more firms wanted to invest more –  the current account deficit would have been wider and the negative NIIP position somewhat larger.  Overall, weak investment looks to be a symptom of weak demand –  both domestic and external.  Firms simply haven’t seen many great opportunities for investment and so, even with all the rebuild and repair work, overall investment levels have been pretty subdued.

And it isn’t as if the economy has been fully employed during that period.  The Governor notes in his speech that the unemployment rate is below the 20 year average. But it is above official estimates of the NAIRU and has been for eight years now.  It isn’t as if there has been an inflation problem either: core inflation has been below target for years now.  And the exchange rate has been extraordinarily high.

There are limits to what monetary policy can do, but stimulating demand –  all else equal –  is what it can do; in fact, it is the reason why we have discretionary monetary policy at all.    The data –  current account, investment rate, as well as the inflation and unemployment rates –  suggest that monetary policy should have been doing more over the last few years.  That it hasn’t is a choice the Governor has made, but having made those choices –  consistently mistaken in my view –  he shouldn’t be trying to sell as a virtue one of the key symptoms of the persistent weakness of demand.