2  Saving, Investment and the External Imbalance

The float of the New Zealand dollar in the late 1980’s and subsequent liberalisation of capital controls, significantly enhanced the economy’s integration with international capital markets. At the same time New Zealand has had a relatively low saving rate as a proportion of GDP compared to average saving rates for the OECD group as a whole (Figure 1). Despite this, New Zealand has more often than not invested more as a share of GDP than the advanced economy average, particularly since the turn of this century. (Figure 2)

Figure 1 - Gross national saving as a share of GDP: New Zealand, OECD and Australia

Source: Statistics New Zealand and OECD

Figure 2 - Gross Investment as a share of GDP: New Zealand, OECD and Australia

Source: Statistics New Zealand, OECD and Department of Statistics Australia

International macroeconomic accounting dictates that an economy’s CAD, or its use of foreign saving (S^*), through net capital inflow equals its investment-saving gap:

CAD = S^* = I - S   (2.1)

Hence, increases in the domestic real capital stock (ΔK) are partly financed by domestic saving and partly by foreign saving:

ΔK = I = S + S^*   (2.2)

A CAD therefore signifies the extra domestic investment that capital inflow finances over and above that domestic investment (expenditure on fixed assets including machinery and equipment, dwellings, non-dwellings, roadworks and livestock) which is funded by domestic saving. This is shown in Figure 3.

Figure 3 - Saving - investment imbalance as a share of GDP: New Zealand

Source: Statistics New Zealand, OECD and Department of Statistics Australia

Depreciation of capital, also known as capital consumption, accounts for a major share of gross domestic saving in New Zealand, in common with other advanced economies that characteristically have large, ageing capital stocks (Figure 4). As a result, net saving has been relatively low, averaging only 2.4 per cent of GDP over the period.

Nonetheless, annual saving-investment gaps still have the same value shown in Figure 3 when capital depreciation is subtracted from the depicted gross saving and investment measures. This is because

Gross I – Gross S = (Gross I – depreciation) – (Gross S – depreciation) = Net I – Net S = CAD   (2.3)

Figure 4 - Gross national saving, net national saving and depreciation as a percentage of New Zealand GDP

Source: Statistics New Zealand

1. Gross saving is calculated as S = I – CAD
2. Net national saving is calculated as Net = Gross – depreciation

Capital inflow therefore normally funds extra net capital accumulation of the same value as the external imbalance. In other words, foreigners finance that much more domestic investment in New Zealand than reliance on domestic saving alone would permit through intermediated loans to resident firms, equity participation and purchases of real assets from residents. When foreign investors directly purchase real domestic assets like property, the proceeds of the sale of domestic assets also supplements the pool of funds available for domestic investment.