Early this morning, I wrote how “New Zealand is a property bubble with an economy attached”, based on the nation’s extreme housing valuations (against GDP and incomes), as well as the extreme share of the nation’s wealth tied-up in housing.
Today, Statistics New Zealand has reaffirmed this view with the annual national accounts showing that dwelling investment has risen to a record high share of total investment, whereas investment in plant, machinery, and equipment (i.e. business investment) has plumbed a 45-year low:
National accounts (income and expenditure): Year ended March 2017 shows residential building investment made up 32 percent of total investment in 2017. This is the first time it has been above 30 percent since the series began in 1972.
In contrast, plant, machinery, and equipment investment had its smallest share of overall investment, dropping to 19 percent in 2017 – to be below 20 percent of total investment for the first time.
“Until 2004, plant, machinery, and equipment was the largest component of investment. While it regained that place in 2009, residential building overtook it in 2013 – the two asset types have followed different trends since then,” national accounts senior manager Gary Dunnet said…
The impact of the surge in residential building investment can be seen by looking at the investment share of GDP. At 7.6 percent in 2017, residential building also had the greatest investment share across the full time series back to 1972.
The picture for business investment – the total of all investment types for all sectors, excluding residential building – is very different. Since dropping as a share of GDP in 2010, from 17.6 percent to 15.6 percent, it has shown little movement…
“Business investment helps make the country more productive,” Mr Dunnet said.
“Businesses may replace old equipment that’s become rundown, worn-out, or out-of-date, or they may be making the most of the latest knowledge and technology.”
“It could be a farmer using new agritech equipment, or an office worker using a laptop and cellphone instead of a desktop PC and a fixed landline. Investment helps make New Zealanders more efficient at what they do.”
A country’s productivity is a key factor in its standard of living as workers share the fruits of their labour. As they produce more for each hour worked, their incomes may rise and the country becomes wealthier.
The fall in business investment is a worrying trend long-term as it infers a less productive economy and lower living standards.
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Basically, New Zealand’s economy has opted for short-term debt-fueled ponzi growth in non-productive houses over sustainable productivity-driven growth.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
