Given 2020 was twisted with COVID, perhaps it is no surprise that business investment sunk to its lowest level since 1991, almost a 30 year low.
But then again, a closer look at the data shows it has been hovering at a low level since 2010, never having recovered since the Global Financial Crisis.
The funk isn't of actual investment levels, but it is as a proportion of GDP.
But even in actual investment levels the recent story isn't that encouraging. In the 2018 calendar year, $49.7 billion of business investment was added. In 2019 it rose to $52.1 billion. But in 2020 it sank to $48.0 billion.
Related to economic output, the recent peak was in 2006 when it topped 18.3% of GDP. Now it is under 15%. In the 14 years since 2006, that is a massive $75 billion in "under investment" by businesses over that period, or more than $5 billion per year.
So the question is, why the increasing reluctance to invest?
A quick check of the chart shows that in an earlier era, investment rates approached 20%. We have never got anywhere near that since.
We can overlay two simple potential factors and make some assessments about their impacts.
Tax rates
Lowering high company tax rates is an idea that is promoted as a way to increase private sector investment. But does the data show that?
Actually, it does at some level. In the 1980s (of Muldoonism), company tax rates were very high as part of a high-tax policy necessary because we had a closed economy in which we were defending a fixed exchange rate, one set by the autocratic prime minister. We also had high unemployment, which required make-work schemes through forcing Government departments to hire the jobless to keep them off the unemployment rolls. It was unsustainable, and eventually collapsed. Business "investment" was twisted into projects that only made sense in a closed economy. But even in this environment, private sector business investment fell sharply from about 20% of GDP to 14% in just four years.
But then the reforming Lange Government reduced the 48% company tax rate to 33%, and investment levels started to pick up again, even if they didn't return to the levels in the closed economy.
However, the next cut in company tax rates did not deliver a rise in private sector investment. The company rate rate was reduced from 33% to 28% in 2010 and the data shows that the rising actual investment barely kept pace with the expansion of the overall economy (as measured by GDP). A 28% company tax rate did not generate any more investment than a 33% rate.
Perhaps this should not be surprising. Business are unlikely to choose to push ahead with a project where a 5% net income difference is the motivation to proceed or not. If it is that close, it is usually not worth taking the risk. So a changed tax rate that small won't be a deciding factor.
Interest rates
Interestingly, similar small variances are usually involved with interest rate changes, and these too won't motivate a 'go' investment decision over a 'no go' one.
Political policy
A more influential factor is the stability of political policy. Unexpected changes and the expectation of future undefined changes in public policy, is never a good basis for making medium or long term investment decisions. That is true whether they are supportive or not. And that is because 'supportive' changes can get changed out at the next election.
New Zealand has been fortunate that, despite the three-year terms of governments, the voters have basically given nine year terms over the past 35 years. And nine years is 'stability' for any commercial decision. Unfortunately, the changing nature of coalitions undermines that.
It is clear from the charts above that whether the Government is 'red' or 'blue', it has very little impact on whether businesses invest or not. Of course, this may well be because centrist Governments anxious to get re-elected and careful not to make transformative changes that may hurt in the short term, can never change policy settings enough and on a sustained basis that will improve the long term investment outlook. Even today, most industries struggle with stop-go and opaque Government policies, unconvinced undermining surprises aren't about to unstitch a brave investment decision. We are trapped in short-termism.
One consequence is that business investment as a share of economic activity is now at its lowest level in more than a generation.
International perspective
New Zealand has its challenges. But we are not alone in that, as this comparison shows. Certainly, even Trump's huge corporate tax cuts in 2016 and program of regulatory rollbacks did not energise investment in the USA.
New Zealand data has been sourced from Stats NZ (with special thanks for their assistance with that). US data is here. Australian data is here. (Australian investment has an outsized component related to mining for their China trade.)
80 Comments
But no GDP qualifying added value.
What one cares is $$$$$ in bank account - how fast and number of time one is able to flip houses and what is GDP.
Mr Orr and Jacinda Arden has tied themselves in a situation where have no choice but to support and promote the ponzi.
Even now have not learnt a lesson and are not ........
Agree only business in NZ is housing business.
"We're stuck with the lowest level of business investment in a generation"
When we as a nation decided to have only housing economy = NZ economy, this should be expected and is no surprise.
Corona virus presented an opportunjty to reset but what does Robertson and Orr does is reset the housing economy to such a level that everything else become meaningless.
Now after a year being fully aware of what has gone wrong and what should have been avoided are not ready to accept and rectify. Is it ego or vested biased interest ???
Mr Orr attitute of least regret earlier and now of wait and watch is self explanatory and sums up the mindset of Orr's and Robertson's of NZ.
Agree only business in NZ is housing business.
In that case, we can invest in businesses related to the Ponzi. I notice the business that is tokenizing housing investment. Not my cup of tea, but at least the entrepreneur is making the most of a situation. I think Nick Mowbray is doing something as well. Not quite sure what.
"We're stuck with the lowest level of business investment in a generation"
What else does one expect - When one can invest little or nothing in housing market - pay minimum deposit and that too can use existing equity to avoid deposit and opt for interest only loan to flip property , why invest in business.
Will have to pay tax when flipping houses, than tax has to be paid even in business but where else can you get fast and easy profit that too knowing, come what may PM of the country and Reserve Bank Governor will see to it that one does not lose money and the craziness continues ( When after double digit growth month after month, PM says that house price should keep on moving up, it is sensless craziness). Either one is stupid or ignorant and in both situation should resign.
Businesses are drowning in rules, regulations, compliance and Govt employment relations interference. These issues apply to most western nations all of of whom copy each other in broad terms. Ask any business owner it's getting worse by the week, the time, productivity losses and associated costs are huge.
An investment in business requires money and hard work and even that does not guarantee money whereas reserve bank and government supported housing market provides guarantee money with little or no investment ( use equity) so...........that too when PM has given a commitment that she will never allow the house price to fall as long as she is the PM........what else does one want.......also reserve bank governor is more about individual default than the individual......where else will you find such a opportunity where profit is of individual and risk of reserve bank and government ( This perception has been created by words and action of both Jacinda Arden and Mr Orr).
Exactly, and maybe a stable government in terms of not changing, but very unstable in terms of new regulations. The regulations are rushed out without thought and little guidance, and the changes effective immediately. It's hard to keep up, by the time you think you understand, the rules have changed again, it's insanely stressful.
No surprises actually.
Given NZ vaccination rates are among the world's lowest and regularity in uncertainties in public policies, especially on compliance and taxation, it's hard for businesses to consider new initiatives.
Vaccination rates across the world,
Ha, this is a no brainer. The property investors and the National Party consider property speculating as a business, so all the cheap money being thrown around has directly gone into the housing market by the ultra savvy business people for the ginormous capital gains they will pocket tax free. Yayyyy!!! Let’s open a bottle of champagne for all the people they are employing and all the tax they are paying!
No bank sees any valuation whatsoever in SMBs (the real work horses and value creators in the economy), so those businesses struggle to access affordable capital unless they put up a house, or give ownership away. Access to capital impedes more investment. The banks eventually come knocking when you no longer need em, 5-6 Years+ into it.
Even established businesses in NZ are reluctant to invest in expansion, training or exploring innovative ideas and products because successive governments in NZ have guaranteed them a constant supply of cheap imported workers.
Our overreliance on industries such as agriculture, tourism and housing will begin to taper off if we were to raise the income/qualification criteria for temporary and permanent migration to a higher threshold.
Any business that was worth its salt and determined to borrow to finance expansion would have done so well before CV19 took the OCR below 2%. Any business that has since thought to borrow simply because such finance is cheap would not stand much scrutiny.in terms of viability. Taking the OCR below 2% has not provided any more stimulus to business, it has just propelled property prices to extraordinary levels and sucked dry any ability to save and equally spend from savings.
Ahh, remember the 90s when agriculture was a sunset industry and NZ future was the Knowledge Economy? And idealogues did all they could to kill rural NZ?
Where, after 30 years is this transformation of the economy?
There's a very small proportion of the NZ working age population engaged in agriculture yet it was agriculture that enabled economic survival through the GFC and Covid.
Through the crises, farmers kept at it. Managing the biological process of transforming sun light, air, water and soil into the products that underpin the nz economy.
I wonder sometimes just how many of the commentators I read here have any experience of taking/managing the risks that, on a daily basis, our farmers assume.
Coincidentally was driving through Canterbury back country today, and the fields that I used to see, growing up in the 1950s and on, brimming with both ovine and bovine stock, were more or less in comparison, an empty landscape. Undoubtedly NZ’s primary production has had much to overcome in markets subsidised both politically and financially, and other barriers to boot, but it might well be, given the past three Labour governments attitude and performance, that the true enemy lies within. Good thinking then, that a face looks better without a nose.
Why would you invest in a "business" and have to dedicate 8 hours a day minimum, worry about whether your product or service will sell well in the current environment, justify your "plan" to a bank or your parents and convince them its a good idea, risk your future credit rating....
when.... better.... you can invest in a "business" just by "working really hard" by putting up your hand up in an auction and then getting Ray White to worry about the day to day running of it...
My perspective is a twist on the above cited housing as the dominating force in investment decisions -
Our massive rent and mortgage costs reduce the ability of kiwis to spend on anything except the cheap forms of home entertainment - Netflix and takeaways. There is no money spare to support clever concepts, restaurants, gondolas into mountain bike parks, it is all cheap hobbies and living-it-up-at-home for kiwis.
So I would only invest in concepts that profit off or improve the ability of kiwis living it up at home on their couches with a celebratory pizza once a week.
Oh please, play a sport, go for a hike, organize a pot luck dinner, go to the beach, do volunteer work, say hello to your neighbors. My parents had a family of 4 budget of $60/week in the mid eighties and we had a wonderful child hood.
Perhaps we have been conditioned that spending money is the solution?
I noticed in Australian they are handing out $100 restaurant vouchers to every citizen, in an attempt to get them out and spend up in hospitality. The government blames it on COVID-19, laughable. It’s a lack of disposable income from the middle (slave) class. Same story in NZ.
There is no or very less deposable income left after paying the huge mortgages, also currently the higher hourly rates demand profit to support the staff salary.
People always thinking about debt they have taken for home which always push back them to spend and which lead to lower footprint at businesses and this will lead to less investment in business and more investment in housing..
Make housing less or no popular for higher return and people will start investing in businesses but if people are buried under huge mortgages again those business will not expand and lead to closure. So these are interdependent the only solution is make houses cheap by discouraging investment in property and make debt costly by increasing interest specifically for housing so that people will not take debt to there eye balls. And make money available for businesses so that it can grow and give more jobs.
Based on the logistics and raw material supply issues, the lack of disposable income is about to get a whole lot worse. My suppliers are talking 5 - 15% increases on goods, not to mention freight is roughly 3x what it was. Gonna be an interesting year as the thumb screws tighten...
Jacinda promised she would make kiwis richer and she delivered. Awesome gains in the housing market. "sustained moderation" is the key..
Germany has a competitive banking system with community banks responsible for most business lending. But we are more awesome with our banks lending for asset inflation making us all richer. And it's not even inflationary.. I can see why jacinda is envy of the world.
To understand the declining investment we need to stand back from government policy and ask fundamental questions about investment opportunities. Where are the new opportunities in a resource-constrained world? The reality is that despite exceptionally low interest rates, commercial companies cannot find sufficient opportunities to generate greater levels of investment. The days of building big paper mills, big milk processing plants, or aluminium smelters are behind us. Most of our current investments are in housing, commercial buildings, service buildings (such as schools and hospitals), and some transport infrastructure. Infrastructure can remove constraints to other forms of productive investment, but in itself will not bring economic wealth for an increasing population in a resource-constrained world.
KeithW
Yep - haven't read this in detail yet, but it seems to be saying we are in a strategic void... https://www.productivity.govt.nz/assets/Documents/Cut-to-the-chase-fina…
Kiwis have never been good at big picture thinking and future planning. We're good at making a silk purse out of a sows ear (making do - number 8 wire). All those frontier companies mentioned are technology companies first and foremost either in hardware or software. Unfortunately our education sector has gotten so bad we don't seem to be able to train people to meet the tech job demand. Any well educated student can do a 3 month bootcamp at dev academy and walk into a 55-70k starting salary right out of school. But in the vacuum all that's left is dumb business - selling our own assets to each other and shoving things in shipping containers when we're on the backside of the planet. Bring on the austerity. It's the only way we're going to shock ourselves into doing something different. The longer we avoid it, the worse it's going to be.
For two decades I've had a couple of investment ideas that I still think have potential (1) child proof locks on fridge doors - I mean stopping a teenager browsing; maybe a camera will do recording who took out what and when (2) indestructible black palm axe handles. Both ideas have merit. I'm sure most readers have similar ideas and like me forget them since they involve up front money and research, dealing with plenty of bureaucracy and if successful a bigger rival business will steal the idea and crush you. Those with the money, say a mortgage against the family home, are unlikely to want to face all the hassle for high risk and minimal reward - investing and building new businesses is for the young. So I bought an investment property - it is comparatively low risk and low bureaucracy with none of the hassle of employing staff.
From yesterday
Richard Werner:
https://youtu.be/TkCU_n0h4Qc
Hear of the importance of supplying credit to SME & private business so they can invest in new technology and resulting productivity to increase gdp.
The example of note is how German family companies get funding for export greatness.
I think you need to stand back further. We are not business people, we are simply too thick.
Our farmers export breeding stock, train up the overseas farmers, and sell our land to corporates (usually foreign owned multinationals). Not exactly a promising long term business plan (Well not at our end anyway)
Our natural resources involve low quality pine which is sold for pennies or natural mineral water which we drain and give away for pennies. We are already seeing issues with the latter, and once that is gone the former falls over as well.
We monitor our oceans like Mr Magoo. Everyone comes in and plunders it without consequence.
Our IT is reliant on two singular cables running out of one city. Can anyone say "contingency"?
Our tourism is a con. Foreign owned and staffed businesses, selling foreign made products, or charging to view our "free" landscape. A few dregs are thrown to some locals to keep them from revolting.
Oh, forgot our biggest industry - housing. Where it costs more to build here per m2 than just about anywhere else, and agents fees are more than just about anywhere else, and the quality is lower than just about anywhere else. She'll be right though... new build comes with a ten minute warranty and the builder liquidated yesterday.
Even if we weren't too thick, most businesses simply don't generate real net wealth. They just move existing wealth around, syphoning off as much as they can to the top dog(s). Liquidate any company and look at what is left, other than a bunch of poor creditors.
Agree. Without the resource base to plunder, there aint no where to invest except .....
"Most of our current investments are in housing, commercial buildings, service buildings (such as schools and hospitals), and some transport infrastructure. "
ie Basically ALL stuff that just locks in a future drain on resources .
We are out of lands to plunder, so we are busy making the Castle bigger and cleaning the moat (just in the meantime until new lands appear)
Keith you are partially right and whilst the coming black economic clouds will be disruptive there will be silver linings including profits and opportunities for individual and companies alike. The key negatives are legislative and regulatory uncertainty supported by a corrupt MSM and obstructionist bureaucrats. Nothing short of a fundamental shift in how we operate will fix things and that applies globally - I am not holding my breath waiting for it to happen.
In other countries, investment in long-term growth and innovation has fallen away as exec boards are too focused on short-term gains and share prices, which when combined with corporate and personal tax settings (and greed) tend to push profits into share buybacks. Be interested to see whether this is the case here.
Well..
1. To have "Capitalism" you need "Capital". To have "Capital" you need a Decent Rate of Interest.
2. Lower homeownership rates means less people qualify for business loans
3. NZ Bank's leading to property speculation is a significantly higher proportion of loans than their OECD pairs
4. The McDonaldization of the private sector and the classic "Red Taping" of new entrances
5. Thousands, NO, Tens of Thousands of somewhat skilled workers in unnecessary public sector jobs
NOTES:
5 seemed to be a good number to stop at, but I could easily continue. Replacing some "White Collar Jobs" with software and streamlining thousands more, IMO would create an economic BOOM and vastly increase the number of private sector jobs [the real economy].
Also regarding investment levels; there could be a spike in investment as businesses/supply-chains reorient themselves. Figures comparing GDP to Investment; a lower/slower GPD could make investment figures look better in percentage terms.. the opposite result could rightfully be argued for too based on economic complexities.
Because you need to have a house to offer as security. There is effectively no venture capital market where people can go and get backing for an idea. Our current banks aren't going to become that lending market either, and nor should they as they don't have the sophistication to lend in that space.
What to invest in? People say all the money is invested in housing, so no money for business. In reality it is the opposite. There are no real opportunities for making money, so all money flows into the only place left still making money (by a self-reinforcing mechanism nonetheless).
NZ internal consumer market is saturated, there is no place or opportunity for competition (market size, established monopiles, duopolies or at best few dominant players) or introducing something new.
Export is harder than you think that you must either have something others do not have at all, or otherwise you have a competitive advantage in making it. The competitive advantage is where NZ is super weak.
Who in their right business minds will go to a very regualted country with very expensive labour, high protections etc, when you can go to a plathora of places and do whatever you want, be close to your consumer market, etc
If the worse case scenarios come to pass then why leverage yourself over the abyss, especially at the moment? Inflation is a dark cloud that looks like it's coming soon (mortgagee sales anyone?), NZ's fuel costs in the coming post-Covid world could be really crippling especially if our dollar starts to lose value, and energy costs may well become the salt to rub into the housing cost wounds especially if renewables cannot achieve greater seasonal reliability and gas field outages keep occurring. Hopefully all of this won't happen but scary times could be closer than we think. Plus, add to this having a government that carefully 'deliberates' until everything becomes totally beyond their reach.
This is due to the way money is created. In NZ most new credit/debt has been going into speculative investments like realestate. We need monetary reform so that credit creation goes to productive enterprise. Prof Richard Werner wrote a book about how the Japanese used to have a banking policy called ‘Window Guidance’. This is basically the steering of credit to productive use instead of speculation. It has also been called a ‘War Economy’ because they carried it on after WW2 but instead of producing weapons they produced consumer items for export.
However this all fell over in the late 80’s when they ‘Liberalised’ their banking system and then most new money went into realestate after that causing a huge bubble. Most people know what happened after their bubble burst.
Hello David,
Thanks for this article.
Three extra thoughts. (1) Business investment should be higher in countries with high population growth than low population growth, just to maintain the amount of capital per worker. Since you report the gross investment position, much of this investment is replacing worn out equipment and this means the net increase in capital per worker is pretty small. New Zealand has one of the lowest amounts of business capital per worker in the OECD, which is one of the reasons why real wages are low relative to many OECD countries. (Of course, capital may be low because innate productivity of labour is low, and thus firms do not find NZ a good place to invest.)
(2) It is hard to know how much tax matters. By many measures NZ has some of the highest taxes on capital income (excluding housing) in the OECD. In one of the standard measures produced by the World Bank, the taxes paid by a medium sized business in the first 2 years of its life, NZ is regularly in the number one spot. (Incidentally, this is work that the Treasury Secretary was closely associated with.) We are regularly in the top four places for the amount of taxes collected from business and capital earnings in the OECD, even though we have relatively moderate taxes overall. If firms choose to locate business in lower tax countries, what matters is the tax on capital income relative to other jurisdictions. By this measure NZ has been doing worse and worse since the 1990s. One of the main reasons for this state of affairs is that NZ has chosen to tax capital and labour income in a very different way than almost all other OECD countries, a way that results in relatively low taxes on labour income and relatively high taxes on capital income. This is completely the reverse of high income countries like Norway of Sweden or Germany, which try and tax labour incomes at higher rates than capital incomes so as not to deter capital investment. (These countries tend to have much more progressive tax systems than NZ as well ). It may be a coincidence that NZ has relatively high taxes on capital income and low amounts of capital per worker (and low incomes), but there is no evidence that NZ's high taxes attract capital investment.
(3) A third factor relative to Australia is the structure of our government retirement system. NZ is extremely unusual in having a pay-as-you-go welfare based system that accumulates no capital. Many countries have contributory systems that accumulate capital. Cross country evidence suggests countries that rely more on Paygo systems have smaller capital markets and rely more on banking systems; in turn this is associated with less risk taking by business and more investment in housing. NZ is in the middle of the pack in terms of the size of its Paygo system, but Australia has a small PAYGO system and is increasing reliant on capital markets rather than banks to allocate investment capital. This may also have something to do with it.
Lastly, while intangible investment is increasingly measured by statistical agencies, some intangible investment, particularly brand creation, is not, and this could vary systematically over time and across countries.
Anyway, thanks again for an interesting article.
'NZ has some of the highest taxes on capital income (excluding housing) in the OECD'. Not that you'd think so to read the legions of contributors to sites such as this strongly advocating even higher taxes on capital. I'd add to your summary of inhibitors a cultural NZ attitude that doesn't place business formation, growth and success as a desirable aspirational life goal.
"It is clear from the charts above that whether the Government is 'red' or 'blue', it has very little impact on whether businesses invest or not" by David Chaston
A point to consider is why is it so, though both party has different priorities. May be wrong but is it possible that ultimately theses politicans run on advise and guidance from so called experts and bureaucrats and they do not change and they also know how to manipulate ministers as are aware that one thing that any minister cannot afford to lose is votes and it is this fear that they (experts and bureaucrats) play to manipulate decession to suit their agenda.
Is this not the reason that why Jacinda Arden now feels that house price should always goes up just like John Key or Bill English, it may be that people surrounding her for their vested interest convinced her that if house growth (ponzi) stops, you will lose votes and that itself is good enough reason for Jacinda Arden to change her view that housing crisis is a goid crisis.
Not realising that if house price move fast from 1000 to 1400 - than instead of it going up further - hyper bubble, it is more advisable economically, fundamentally and even socially that it correct little bit by 5% or 10% than also after the correction, will still be 30% more on annualised basis, which is fantastic but ......
NZ need a Leader not politicians as one leader can change / shape the future of country just like Lee Khan Yew - prime minister of Singapore.
Jacinda Arden had a perfect opportunity but lacks far sighted wisdom.
David, the charts appear to start from 1987, but the ‘reforming’ neoliberal Lange Govt came into power in 1984. So the decline in investment from 1987 can’t really be said to be a result of the Muldoon government policies. In fact, the decline in investment appears to coincide with the 1987 sharemarket crash. And investment never recovered back to the 1987 levels. Similarly, the GFC coincided with another steep decline, with minimal recovery since then
Obviously since many households have property mortgages up to their necks or are paying exorbitant rents, leaving little disposable income for any other type of investment let alone innovative enterprises.
I am sure the landlords' club can see something positive from this in contrast to all negativity the rest of us display around these forums.
It is all a matter of cultivating confidence and reinforcing confidence. Unfortunately instead we have Mr Orr, who like a stuck record points out how utterly screwed the RBNZ believes we are, over and over and over. Whenever there has been even a hint that we are enjoying a recovery, Mr Orr has been quick to rush in and lower interest rates (because he believes the economy is totally screwed). Right now there are inflationary pressures, but Mr Orr has been quick to state that he will "look through" this and keep interest rates low, because he has examined the underlying strength of the economy and decided this is not growth - essentially saying we are completely screwed.
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