Capital spending rise to test NZ's poor savings record

New Zealand's poor savings record and reliance on money from overseas to fund investment spending will be tested if capital spending such as house building picks up, BNZ Capital senior economist Craig Ebert says.

This country had the worst of both worlds, with substantially negative cash flows being run in households and, increasingly by the government.

The national savings rate had taken "quite a hit" in the year to March, dropping on a net basis to just $500 million, from $4.1 billion a year earlier.

On a gross basis, the savings rate subsided to 14.9 per cent of gross domestic product, to be further adrift of the relatively resilient gross investment ratio of 21.7 per cent, said Ebert.

The numbers underscored this country's fundamentally high reliance on foreign capital to fund its investment spending.

"While this relationship is nothing new, and can be managed, it will certainly be tested to the extent capital expenditure begins to pick up, as looks likely next year, including in home-building activity. We'll need to know where the funds are coming from."

The low household savings rate suggested that sector could not be any strong or sustained source of recovery over the coming years.

Savings as measured by the household income and outlay account (HIOA) for the year to March showed this country's household savings to be far and away the laggard among its peers, Ebert said.

As a percentage to disposable income, household savings slipped to -13.7 per cent in the year to March, from -11 per cent the year before. Elsewhere in the OECD the range was from slightly positive in the United States to substantially positive in most of Western Europe.

Ebert acknowledged that Statistics New Zealand described the HIOA as experimental, but to assume that meant it could be ignored as a "ropey" account, as many were quick to do, was wrong.

None of the excuses for the condition of this country's HIOA could reasonably deny a clear deterioration in the household savings rate since, say 2003, to unsustainably low levels.

Low savings kept the squeeze on domestic sources of bank funding, Ebert said.

That was already a big issue, made apparent by the Reserve Bank's directives for local banks to source more funds internally as opposed to resorting to the usual lines from abroad. That would maintain upward pressure on overall funding costs, as banks kept a premium on local deposit rates in the battle for scarce household funds.

- NZPA