February 2011

Private credit growth in New Zealand has been relatively flat in the past two years as households and businesses increase their savings, but as this graph shows Government debt is set to climb rapidly in the next few years - peaking at $73.4 billion in 2016/2017 and taking until 2025 to come down to current levels.

We want to lift our national savings – that’s households, businesses and the Government - because it reduces New Zealand’s vulnerability to foreign lenders, reduces pressure on inflation and interest rates and helps exporters by taking pressure off the Kiwi dollar.

However to achieve this the Government needs to reduce its own borrowing, which is forecast to drive up New Zealand’s national debt over the next few years.

The Prime Minister has already outlined moves to get the Government’s accounts back surplus faster and you’ll see more policies in Budget 2011 designed to increase our level of national savings.

November 2010

11 November 2010 - As I’ve said previously, households are changing their behaviour and are spending less and saving more.

This is reflected in this chart - taken from the Reserve Bank’s latest economic forecasts. It shows that consumption as a proportion of GDP, which rose steadily between 2001 and 2007, is now on a long term downswing.

This is helping rebalance our economy towards saving, investment and exports and away from the excessive borrowing and consumption over much of the past decade that led us into recession.

While this adjustment means slightly flatter growth in the short term, it will provide a stronger platform for sustainable economic growth in the future.

November 2010. Recently I’ve talked about the rebalancing that is underway in our economy as a result of people spending less and saving more.

This chart shows whether, at an aggregate level, households are injecting or withdrawing equity from their homes.

It does this by looking at the amount that households are spending on new housing or renovations, and comparing that with the change in the value of mortgages being secured against the housing stock.

When the increase in mortgages is greater than the new investment in housing, this is effectively an equity withdrawal. An example of this is if you increase your mortgage to pay for a holiday. Conversely, when the new investment in housing is larger than the increase in mortgages, this is an equity injection.  An example of this is if you fund your renovations from saving rather than increasing your mortgage.

The chart shows that households undertook a massive equity withdrawal in the middle of the last decade, peaking at over $7 billion in the year to June 2007.

There was a significant change in behaviour after that. Households moved sharply from funding via borrowing to saving, with the equity injection in the year to March 2009 being almost $5 billion.

This turnaround is equivalent to about a 10% reduction in incomes, in terms of household spending.

This is why we are not experiencing a consumption/retail led upturn.