I wouldn’t be expecting the New Zealand economy starts catching up to Australia any time soon. While they have their usual ideological stoushes there’s something that sticks out like a ham sandwich at a bar-mitzvah. NZ is capital starved. Owing it seems to our compulsory super system, we are not. These charts from a bit of work I did on NZ are now out of date but make the point nicely.
Our own household savings performance has been pretty woeful up till the GFC, as we reduced our household savings nearly as fast as the compulsory super system forced us to increase them. But the GFC has put paid to all that with our savings rate shooting up to around 10%. Banking Day reports as follows on an OECD study.
An OECD ranking of household savings rates puts Australia fifth among the 23 countries surveyed, with 10.4 per cent of household disposable income going into savings in 2011.
Switzerland is top of the table, with a savings rate of 12.1 per cent in 2011, followed by Sweden (11.7 per cent), Germany (11.3 per cent) and Belgium (10.7 per cent).
Back in 2006, before the financial crisis brought the country?s borrowing binge to an end, Australia?s household savings rate was 2.1 per cent. Its OECD ranking that year was 16th.
OECD economists are forecasting that Australian households will maintain their high savings rate. The forecast for the current year is 10.3 per cent and for 2013 the expected rate is 10.5 per cent.
Among the weaker savers last year were New Zealand, with 0.6 per cent of disposable household income going into savings, Denmark (negative 1.7 per cent), the Netherlands (2.3 per cent), the Slovak Republic (3.1 per cent) and the United States (4.6 per cent).
I’m surprised it would make much difference, because I would have thought that the NZ idea of domestic savings would have included Australia’s $$. I mean, all of their banks are Australian anyway.
I’m not sure I understand your point wilful, but if I do it seems wrong. The household savings of NZers might be in NZ or Aus dollars. It doesn’t make much difference. They need to save to invest, or borrow or otherwise rent someone else’s savings (which savings can likewise be in NZ or any other currency.
It is dubious to assign our recent capital influx to improved household savings, and dubious to assign the improved household savings to compulsory superannuation.
Taking comparative household savings rate as a proxy for capital availability is just silly. , and of course in a small open economy there is no reason capital investment should be influenced by the household saving rate anyway. That’s what the current account is for.
Secondly, you must know the uptick in the household savings rate is a largely cyclical phenomenon. Australia has long had a low household savings rate accompanying a high corporate savings rate – most people think that a product of our tax system.
Thirdly, the difference in trends in capital intensity per hour worked is surely a product of our commodities boom – another cyclical phenomenon. Mining is about the most capital-intensive industry around.
Sorry Nicholas, my point is that if I understand it, savings generally go into banks and the reason having a high savings rate is good is because it gives banks the ability to easily lend without having to borrow. If New Zealand had had a parochial banking system that had to borrow internationally, then it would be capital starved. however, don’t the rely on australian savings, being australian banks? And so, New Zealand doesn’t need a high savings rate, since we’ve got one?
That is utter nonsense. Bank lending creates deposits (see here and here).
The only way the private domestic sector (households and corporatations) can net save is for the government to run deficits.*
The NZ private domestic sector will not be able to increase their savings erate unless the NZ government starts running largers deficits (as a % of GDP).
The rise in Australian savings is correlated with Federal Government budget deficits. Just the way the fall in household savings during noughties was correlated with budget surpluses (external sector = current account deficit has been relateivly stable).
* ignoring the external sector
DD,
I think you’re fighting shadows.
As you said I must know the present uptick in savings is cyclical. I do and wrote what I wrote assuming that it was. Perhaps you sd re-read it with that in mind.
The relative rise in capital intensity per worker does not coincide with a mining boom. And I’m aware that one can import savings – this is the kind of thing the CIS said and made the centre of their analysis. As if it all those people who thought compulsory super was a good thing didn’t understand that you can use others savings.
Wilful, if NZ imports savings it doesn’t make much difference where it imports them from. It’s still importing savings and there are limits to how much they can do that – ask the Latin Americans.
Joshua,
Not sure why you’re omitting the external sector when that’s what I’m talking about – the need to import others’ savings (which I think should be done in moderation – see last point).
I’m not excluding the external sector… let me explain.
Imports are REAL benefits. Exports REAL costs. (See here) (NB: This is directly opposite how the majority of people view the external sector.)
If I understand you correctly, you are suggesting (A) NZ needs to reduce their current account deficit which will (B) allow the domestic private sector to increase “savings” which can then be used to “fund” investment.
The reduction in their current account deficit will presumably be achieved through a devaluation of the NZD making exports cheaper and imports more expensive.
I don’t agree with either part of that chain of thinking.
(A) A reduction in NZ’s CAD will reduce NZers real standard of living (they will be consuming less imports and sending more real goods and services offshore (higher exports)).
(B) Higher private domestic sector savings will not “fund” investment. This is because loans create deposits (see here – same link as before) and credit growth is demand driven.
Trade deficits can be extremely benifical: “For example, in a nation building phase, countries with insufficient capital equipment must typically run large trade deficits to ensure they gain access to best-practice technology which underpins the development of productive capacity.” (see here)
A better way to help New Zealand households save more would be for the government to run larger deficits to accompany their CADs. That would allow NZ households to save and enjoy the REAL benefits of running a CAD.
The New Zealand government can run deficits and not be subject to solvency risk (NZ has their own currency, no foreign debt and a floating exchange rate).
It is not fair to compare New Zealand to the Latin American nations.
The Latin American nations had government debt deonominated in foreign currencies. New Zealand doesn’t.
So the Latin American governments were subject to default risk on their foreign debt. The New Zealand government isn’t.
See here and here
Hi Joshua,
“If I understand you correctly, you are suggesting (A) NZ needs to reduce their current account deficit which will (B) allow the domestic private sector to increase “savings” which can then be used to “fund” investment.”
Nope. I think NZers save too little and (presumably partly as a result they invest too little). This leaves them capital starved, capital rationed and too dependent on importing others’ capital for the investment they do undertake. There’s nothing wrong with using others capital – especially if you’re a ‘young country’ with investment opportunities outrunning savings requirements, but the Anglosphere has tended to overdo this and Aust and NZ until recently have had larger CADs than I think is prudent. That has been less of a problem for Australia because even before the GFC, an increasing proportion of the CAD went to fund investment – and it was investment in the traded sector giving an additional reason for comfort.
So I’ve been a savings hawk for some time. I also think that, since Keynes didn’t get to introduce his pet system which was designed to impose symmetrical disciplines on both debtor AND surplus countries at Bretton Woods, the world has continued to be a dangerous place for debtors. That’s the lesson the Asian’s took out of their crisis. And it’s a theme of earlier work by Tony Thirlwall (if I’ve got his name correct) suggesting that if you want to run Keynesian policies in a small open economy it makes sense to ensure you don’t have a foreign constraint. Keynes himself sketched some of this out in the General Theory in his chapter on Mercantilism.
So if you want flexibility in a global crisis – like China had – then a bias towards savings makes sense. In our own case that doesn’t take me to the position that we should be net capital exporters (though it might in a sufficiently contractionary world which, but for the BRICs we might well be heading into), but it makes me wary of all the ‘so far so good’ commentary that we’ve had from Treasury now since the mid 1990s. As Ross Garnaut once said to me “Foreign debt is never the problem, until it’s the only problem”. As I’ve said above, nowdays I’m feeling a bit more relaxed about it given how much of our CAD is going into mining investment.
So I don’t want the NZers to reduce their CAD to increase savings, I want them to increase savings to reduce their CAD (and probably more importantly increase their capacity to invest – and yes I know that up to some point they can use foreign savings.)
You say they borrow in their own currency. Are you sure they do? What proportion is in their own currency? And what proportion is just hedged for a few years?) In any event, even if 100% of their borrowing was in their own currency the denomination of their currency is significant mainly for the pathway of adjustment. There’s still an optimal level of borrowing. If they borrow excessively in their own currency it’s not some magic pudding. They will be forced to adjust in some way – even if in a less immediately severe way than would be imposed upon them if borrowing in another currency. For instance the adjustment might come via domestic inflation.
NZ’s lack of domestic saving is not
its problem. It will always be a
capital importer. NZ is suffering
from its size, its distance from
major markets and the silly
cargo cult legacy of the Business
Round Table, which favoured a
low-wage, lightly regulated ‘vision’
of the economy that was only ever
going to result in a needless bidding
war with emerging economies with less
to lose. NZ’s greatest strengths
should be creativity, good
governance and its relatively high
standard of education. It traded
those off thanks to white shoed, quickick
buck wankers who infest think tanks
and who have never had an original
Idea in their fucking lives.
A quick scout on Wikipedia shows that the NZ government debt to GDP ratio is higher than Australia, and the NZ external debt is also higher than Australia so it kind of looks like they have already been giving the big deficit strategy a go. Please note that NZ GDP per capita is significantly lower than Australia so as a rough and ready rule, the strategy is not delivering the goods.
I’d like to take this moment to thank Paul Keating, Peter Costello, the Australian mining industry and our tenacious farmers.
Of course, any foreign investor who buys those NZ-denominated bonds is facing a risk, but that’s the thing with risk, you can move it around, not make it go away.
And that’s what wo got in Australia, thanks to a Liberal government. Flexibility in times of crisis depends entirely on good preparation before the crisis hits.
Did I just call John Howard a prepper? Hmmm….
Would the lack of a major mining industry be the difference?
Riddle me this…
NZ GDP is approx. NZ$200 billion at current prices (see here)
NZ Household Financial Assets (only one part of private domestic savings) were $213 billion as at December 2010 comprising deposits ($105 billion), super ($28 billion) and other assets ($78 billion). (See here)
So Household Financial Assets exceed GDP at current prices. How much more should NZers save?
Quite a bit more given the CADs they’re running.
Why is it that assets (a stock) exceeding GDP (a flow) is such an achievement?
Certainly the equivalent figures for Australia suggest we’ve got much more domestic capital floating about with Super equalling GDP on its own and deposits comprising a similar share of GDP to the amount they occupy in NZ. (It’s always puzzled me why we need such large deposits, but there you go we do – I guess people have good reason to have them – but I digress).
Savings and investment is largely a paradigm of demographics whereby the aging in order to fund their retirement lend to the young for household formation and in order to takeover the reins of capital. Ipso facto any unusual macro demographics impinges on that and welcome to the baby boomer bulge. It was inevitable that such a bulge would require some innovative finance (largely debt) by the time that demographic was at its peak in the 80s, but what started out as a necessary and innovative imperative would turn into the greatest Madoff Scheme the world had ever seen. The Australian savings ratio of largely that demographic now, is a natural response to having the financial wool pulled over its eyes, re its real savings position.
The introduction of compulsory super in Oz, whilst forcing a degree of sensible retirement saving on a generation, has likely had another remarkable spinoff now with that notable rise in the savings ratio. It has focussed the minds of every holder on the size of their particular savings jar and when it went backwards with the GFC, they naturally responded en masse. Take a bow policy makers now and it would be interesting to do a comparison survey of say public servants in particular, comparing the recent savings response of those fortunate souls able to retire on fixed pensions(the old scheme), vis a vis those solely relying on lump sum super accounts. My hunch is some serious salary sacrificing is going on with the latter group approaching retirement now. That is no doubt affecting PAYG tax receipts and I’d expect a profligate Labor Govt needing to make good on its budget surplus promise to respond accordingly, if it can’t screw the money out of the economy elsewhere. Watch for it.
All of this salary sacrificing for super. I’ve never understood why Governments offer more in tax deductions for super than they save by not paying the pension (which unless the saver saves an awful lot, they have to pay anyway).
Australia’s compulsory super has been the best thing for business despite it being for workers. There are problems with it as Oliver has pointed out with excessive tax breaks and allowing full payouts which people often blow and go on the pension anyway.