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Key Statistics - article, December 1999, p7
National savings have fallen to a level not recorded in New Zealand since the 1970s. This article comments on savings, spending and growth in the household, business, government and external sectors.
National savings at historic low1,2
In the year to March 1999, the two key components of national income, employment income and business profits, measured in current prices, recorded little growth. Yet in spite of the sluggish growth in business profits, investment income remitted abroad increased. Moreover, while both dividends remitted out of New Zealand by foreign investors and interest paid on money borrowed abroad increased, there was a drop in dividends earned by New Zealand companies from overseas investments. As a result, national disposable income, which measures all income earned by New Zealand residents, decreased 0.6 percent.
Furthermore with increases in both private and government spending, national savings fell to a level not recorded in New Zealand since the 1970s. As a percentage of national disposable income, savings at 2.6 percent were the lowest recorded since the series began in 1962. The only sector to record significant savings was the government sector.
While current spending by both households and government was up, capital spending was down. Total investment in current prices on fixed assets and stocks fell $1,870 million in the year to March. However, with the level of savings historically low, even this lower level of investment continued to be financed offshore. The need to increase borrowing has been further exacerbated by the decrease in capital income brought in by migrants, which after peaking in 1996 at more than $2 billion has been negligible in the last two years. The result has been that New Zealand’s level of international borrowing has risen from last year’s record level to a new high. Net borrowing from the rest of the world climbed $1,015 million to $6,516 million or 6.6 percent of GDP.
The contraction in national income was an outcome of a small fall in economic activity, which had been slowing since 1994. Gross Domestic Product (GDP) in real terms fell by 0.2 percent and in current prices rose 0.9 percent. The fall in economic activity was influenced by the downturn in Asian economies which occurred in the first half of the 1998 calendar year, and a second season of drought.
Household sector
With growth in employment income, which contributes more than 50 percent of household income, being flat in 1999, total household income increased only modestly. In current prices, household income rose 1.0 percent in 1999 with the sluggish growth in employment income being compensated most noticeably by lifts in entrepreneurial and benefit income. Cuts in income tax also lifted households disposable income, but as in 1998 households spent it all.
With consumer spending, which was up 3.4 percent, increasing faster than income, the overall effect has been households dissaving for a second successive year, following negligible saving levels in the three previous years, 1995-97.
In real terms, household consumption was up 1.3 percent for the March 1999 year, well below the average increase of 4.1 percent over the previous five years. The high rates of unemployment, which remained around 7.5 percent for the year to March, may have contributed to the expenditure slowing. Apart from the June quarter, consumer spending was strongest for durable goods, noticeably furniture, appliances and cars.
The strength of this spending was probably the combined effect of interest rates being at low levels after October, tax cuts, cashing in of shares following the AMP demutualisation and lower prices for cars following the removal of tariffs in May 1998.
In the year to March, investment in housing fell 15.1 percent. Investment did, however, pick up in the December and March quarters, after four quarters of decline. The turn around coincided with mortgage interest rates being at their lowest in more than two decades.
Business sector
Following the buffeting the business sector experienced in the June 1998 quarter, growth over the remaining three quarters was steady but unspectacular. For the year to March business activity fell by 0.3 percent. Growth in business activity peaked in 1994 with an annual rate of 7.2 percent. Since then the rate of growth has declined each year. As Table 1 shows the fall in the latest year was consistent across primary and goods production industries with the largest decrease in 1999 occurring in manufacturing.
The year to March, embracing the effects of two consecutive dry summers, proved difficult for farmers. As in 1998, dairy production tailed off earlier in the season than normal. The falls in meat and dairy production carried through into primary food manufacturing which fell 9.2 percent and was a major contributor to the overall drop in manufacturing activity. The largest fall, however, occurred in the machinery and equipment manufacturing industry with the closure of local car assembly plants and restructuring being the main causes.
Forestry and logging made a good recovery following a dramatic slump with the downturn in Asian markets, but activity was still down for the year as a whole. The sluggish housing market in the first half of the year resulted in total construction activity falling markedly by 6.7 percent for the March year.
Although service industries recorded an annual growth rate of 2.4 percent, the rate has continued to slow from the high of 7.0 percent recorded in 1995. Over the last six years, the volume of activity in the communications industry has almost doubled and shows no signs of tailing off. For the year to March growth was 12.1 percent with telecommunications being the main driver. The transport industry remained subdued for most of the year, but picked up in the March quarter on the back of recovery in export markets for logs, while activity in distribution was buoyed by consistent strength in consumer spending throughout the year.
In spite of the slowdown in the economy, business investment was stronger in 1999 than in 1998, up 3.8 percent on the low growth rate of 1.5 percent recorded in 1998. Most of the increase was investment in plant, machinery and equipment, although there was also a lift in spending on infrastructure.
Government sector
In the year to March 1999, government spending was flat, down 0.4 percent, after recording growth of 12.5 percent in the three years to 1998. If, however, the purchase of the frigate Te Kaha is excluded from the 1998 figures, growth for the March 1999 year was 3.4 percent. Increased spending was most noticeable in education and health.
External sector
New Zealand’s transactions with the rest of the world in current prices continue to be characterised by a surplus on trade in goods and services. The surplus, however, continues to be more than offset by a deficit in net investment income flows and other transfers, resulting in an overall current account deficit. This deficit, offset by any net capital transfers, must be financed by overseas borrowing. Since 1994, the current account deficit has increased as real import growth has outstripped that for exports, see Figure 7, and as investment income flows abroad have remained high.
In spite of primary production being depressed by the drought and, for part of the year, by the Asian economic downturn, export volumes rose 2.1 percent in the year to March. This was the result of strong growth in the exports of services, more than offsetting a fall in the volume of goods exported. Travel services mainly contributed to the lift in total services, with visitor numbers from Australia, the United States and the United Kingdom more than making up for the drop in tourists from Asia.
Growth in imports peaked in March 1995. With the trade-weighted exchange rate moving against importers from April 1997 through to December 1998, the growth in imports has slowed to 3.4 percent. The rise in volumes reflects increased investment in imported machinery, increased household spending on cars following the removal of tariffs, and increased spending especially in the first half of the March year by New Zealand tourists overseas.
Revised National Accounts
The series discussed in this article are based on the 1968 version of the international standard, viz the System of National Accounts. In April 2000, Statistics New Zealand will release a revised set of national accounts in which the time series will be presented on the basis of the 1993 revision to the System of National Accounts (SNA93). Conceptual changes arising from the introduction of SNA93, while not extensive, will result in revised estimates of production, investment and consumption.
The opportunity is also being taken to extend and refine the measurement of some other components within the system. In the latter case the most extensive change arises from the development of capital stock series by industry by asset type, which are a key to measuring productivity. As part of this project it is proposed to produce estimates of replacement cost depreciation by industry and to expand the coverage of the estimates of depreciation to include that for fixed assets owned by nonmarket government services.
At the same time the New Zealand System of National Accounts (NZSNA) will change from using the New Zealand Standard Industrial Classification (NZSIC) to the Australian and New Zealand Standard Industrial Classification (ANZSIC).
The 1995/96 inter-industry study incorporating SNA93 changes, ANZSIC and further extensions to the NZSNA will become the new benchmark for the national accounts. As a result of the SNA93 changes and the extensions to the existing NZSNA and the rebenchmarking, the value of GDP in 1995/96 will increase by something in the order of 3 percent. GDP in constant prices will also be rebased to the 1995/96 year but the method of base-year weighting will be replaced by chain-linked indexes.
The most significant changes are as follows:
SNA93 changes
- Asset boundary extended to include mineral exploration, computer software and the growth of some livestock.
- Inclusion of depreciation on infrastructural assets.
- Reclassification of income from the ownership of intangible assets (royalties) as income from services.
- Reclassification of some taxes paid on production by businesses and some fees paid by households as payments for services.
- Discontinuance of the nominal finance industry with the payment of financial intermediary services allocated to users.
Introduction of ANZSIC
- ANZSIC replaces NZSIC for analysis by industry.
Extension of NZSNA
- Depreciation measured on the basis of replacement cost and for non-market government services.
Rebase of GDP in constant prices
- Chain-linked indexes replace base-weighted indexes.
Footnotes
NatSavLow.pdf (34 Kb)
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National Accounts
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