Jump to-
Recent key developments in MAKE│NZ
In our never ending quest to bring you the latest in manufacturing news, locally and globally, we have another never ending quest (it’s very Inception-like). That quest is the quest for feedback.
This week, after reading, we’d like to know your thoughts- there’ll be the same poll at the top and bottom of the newsletter so you can choose where you vote.
Invitations to our next Production Managers’ Group meeting on September 17 will be sent out to eligible members shortly. Hosted by Hamilton Jet, with their major expansion, the meeting will focus on opportunities and challenges when designing the lay-out of and processes in a new production facility. If you didn’t receive an invitation, but would like to attend, please let me know: dieter@makenz.org
Recent key developments in New Zealand
As we’ve been told many times, New Zealand’s productivity growth is lagging behind its OECD peers. Capital is a key factor in improving productivity, and our limited use of capital in productivity improvement is part of the reason behind that laggard performance. In turn, one reason for the limited use of capital may be restricted access to it. Is that because most of our capital is tied up in property and not available for equity investment? There is some evidence for that, but it is certainly not the only, and may not even be the dominant factor. Another impediment is our cost of capital, which is higher than in many other OECD countries. Part of the reason for that is the high level of household debt, about 90% of which is being used for investment in property, including owner-occupied homes.
•Just a quick note on electricity prices, provided by the Electricity Authority:
“National hydro storage is still low. As a result, this week, the Electricity Authority changed the risk assessment of wholesale electricity prices in our weekly snapshot from green (low risk) to amber (medium risk). Without significant rain and snowmelt to increase hydro storage, more thermal generation will be needed in the coming months, which will mean higher wholesale electricity prices.”
•The comment on the need for house prices in New Zealand to fall, made by Housing Minister Chris Bishop a couple of weeks ago, is still reverberating in the media. Unfortunately, the debate was very quickly narrowed down to our favourable dinner table topic – property prices, completely ignoring the real point Minister Bishop was trying to make – that “…real productive wealth comes not from house prices, but from investment in manufacturing and technology and other things that actually drive productivity growth …” – in other words, implying a mis-allocation of capital in our economy.
But is there such a mis-allocation, and what actually is the connection between rising / high house prices and productivity? Like most things in economics, straightforward cause-and-effect relationships are rare. But there is a connection here around the availability of – and competitive access to – capital.
Government has many levers to put downward pressure on property prices. But most New Zealand politicians – keen to get re-elected –regard advocating for a reduction in property prices as equivalent to ‘touching the third rail’. All the more kudos to Minister Bishop for stepping up. It will be interesting to see whether his colleagues will follow and adjust economic development policies accordingly, for example by taking measures to support growth in manufacturing. The fact that the Prime Minister poured cold water on the idea straight away yesterday morning (“ …what we want to see is modest consistent increase in house prices …”) doesn’t bode well. Nor does the fact that the leader of the opposition, Chris Hipkins, demonstrated his fear of the third rail and refused to second Chris Bishop’s move in an interview this morning.
It is generally accepted that both labour and capital are contributing factors to improving productivity, and sustainable productivity improvements need both to work hand-in-glove. Think of buying a more capable CNC machine and the training of operators that can use the machine to maximal effect.
When we look at New Zealand through the lens of a recent IMF Report, we find that both productivity improvements (GDP/hour worked) and the use of capital to drive productivity improvement (Capital stock per hour worked) have grown more slowly than in selected other OECD countries:
A sector breakdown provides little comfort, either. The gap in recent productivity improvements between OECD averages and New Zealand performance is as big for manufacturing as it is for other sectors in the economy, with the exception of – surprisingly – construction:
The IMF Report also notes that New Zealand also has a shallower equity market than other OECD peers – much lower equity market capitalisation relative to GDP, and a lot lower level of movements of equity:
The fact that – at least in manufacturing – many of our companies, even bigger ones, are held privately, or conversely, that we don’t have many large listed companies, doesn’t help here.
Thus far we have established that – by comparison – New Zealand is doing a poor job when it comes to using capital to improve productivity. We have also established that New Zealand has a shallow equity market. Is that because of a highly skewed allocation of capital to housing (property) and equity, respectively, in favour of the former?
That ratio has certainly grown rapidly over the past 20 years (n.b. the graph indicates, but doesn’t fully capture, the extremely rapid increase in property prices during and following the COVID-19 pandemic):
What does the asset value split between housing and equity investment look like by international comparison?
New Zealand is not ‘way out there’, but still the most skewed among the countries included in this comparison. Note, however, the highly balanced position in the USA – something to do with the strength of its economy?
Another study looks at annual investment, rather than asset distribution, for the period up to 2014
It does provide stronger evidence of a comparatively more skewed allocation of capital in favour of residential property. The data in this study only goes to 2014, though.
Still, does all of the above add up to strong proof that growth in our economy is hampered by businesses being starved of access to capital, which in turn is because collectively we prefer to invest our money in property? Not sure …
•Apart from the availability and access to capital for investment in productivity improvement, there is another factor – cost. We can see here that the cost of capital in New Zealand has been consistently higher since the mid-1990s. The graph goes to 2015, but that relationship has been persisting since then:
The study quoted here explains: “A shortfall in domestic savings relative to investment is the starting point for some explanations of high real interest rates. Net national savings have averaged just over 4% of GDP in New Zealand since the early 1990s, which is among the lowest in the OECD. Although national savings are low, … total investment as a share of GDP has been around the OECD average. As such, there is a considerable and persistent shortfall in domestic savings relative to investment needs.
With a shortfall in domestic savings, fulfilling New Zealand’s investment needs means borrowing the savings of foreigners. … Over time, this cumulates into a sizeable international debt burden – although it has improved somewhat over recent years, New Zealand’s net international debt has hovered between 70–80% of GDP since 2004. In contrast to other similarly indebted countries, a high proportion of this debt is held by the private sector whereas net Government debt is relatively small.” n.b. the study quoted here was published in 2016. When we look at the latest data, we can see that the situation has worsened quite a bit since 2015:
… and mortgage liabilities currently make up about 90% of household debt.
Recent key developments in the World
•When is a deal a deal?
“We just completed a massive Deal with Japan, perhaps the largest Deal ever made. Japan will invest, at my direction, $550 Billion Dollars into the United States, which will receive 90% of the Profits.” The US President on July 23, 2025.
“There is no deal until there is a deal. Nothing is agreed until everything is agreed.” The US President after his meeting with the President of the Russian Federation on August 15, 2025.
It looks like the Japanese are just learning the hard way about the second statement of the US President. Ever since the ‘deal’ was announced, there have been disagreements between the US and Japanese government regarding the nature of the $550b investment ‘Japan’ is to make in the US. Who will provide the funds? What kind of ‘investments’ – loan guarantees, loans, or equity? Who will decide what the targets of these investments will be? Whom will the returns of these investments go to? Will the investments already announced recently by Japanese companies (Softbank; Nippon Steel) be counted as part of this?
There appears to be no agreement between the two parties on the answers to any of these questions more than six weeks after the ‘deal’ was announced. Th US government is applying its refusal to implement the application of a reduced tariff on car imports to the US (from 27% to 15%) – agreed as part of the ‘deal’ – as leverage to get the Japanese government to agree to its interpretation: “The Japanese Agreement, which we are gonna announce later this week, that’s $550 billion at the hand of Donald Trump … he can go invest it ..” said US Commerce Secretary Howard Ludnick in an interview with Fox News on Aug. 25. When asked a day later in Tokyo about Lutnick’s remarks, Ryosei Akazawa, Japan’s chief tariff negotiator, declined to comment. Watch this space … Meanwhile, the Indian government has apparently decided that India will be better off weathering a 50% tariff than agreeing to a deal of the kind Japan has agreed to.
•Along the same lines, a recent letter to Ursula von der Leyen, President of the European Commission, written by Bertram Kawlath, President of the VDMA, the voice for the machinery and equipment manufacturing industry in Germany and Europe. The US is the most important export market for German manufacturers of machinery and equipment, and the expectation had been that the ‘all-encompassing 15% tariff’ trade ‘deal’ struck between van der Leyen and the US President had set the upper limit, bad enough as it is.
No so. “To our dismay, the United States imposed punishing new tariffs far higher than 15 percent on a range of machinery products, weeks after the agreement was reached. Still worse, the U.S. Administration has signalled its plans to expand this list in the fall.” says the letter. “In particular, the new wave of Section 232 duties imposed on August 18 [see also last week’s newsletter] has squarely hit machinery and equipment. While the March round of tariffs on steel and aluminium derivatives impacted primarily the spare-parts business of machinery makers, this new round hits core business lines: both critical industrial components, as well as finished machines. Approximately 150 new product codes under Chapter 84 have been added to the list of steel derivatives, including those for motors, pumps, injection moulding machines, material handling machinery, industrial robots, agricultural and construction equipment, and bearings. Additionally, 15 new codes have been added to the list of aluminium derivatives, with further impacts on machinery articles outside Chapter 84. These new duties were imposed weeks after the handshake agreement in Scotland, without any time to prepare, and without even an “on the water exception” for goods already in transit. As a result, about 30 percent of U.S. machinery imports from the EU are now subject to 50-percent tariffs on the metal content of the product. Moreover, Section 232 tariffs come with painful new bureaucratic burdens, requiring declarations of country of melt and pour for steel, country of smelt and cast for aluminium, and proof of price paid for the metal content by suppliers. These requirements impose costly paperwork and compliance burdens for European manufacturers—again, without any advance notice.”
No more to add to this – except that it will be interesting to hear from our members on how these Section 232 tariffs in particular will impact on their exports to the US. You’ll find out more at our Fireside Chat on Sep. 8 – there is still time to register for those eligible! Send us an email: dieter@makenz.org
•STOP PRESS: As widely reported, the U.S. Court of Appeals for the Federal Circuit’s has ruled to strike down President Trump’s use of special powers to set tariffs. The 7–4 appeals court decision on August 29, upholding a U.S. Court of International Trade ruling that the tariffs are illegal, permits the tariffs to stay in place until October 14 to give time for an appeal to the Supreme Court, which the administration has signalled it will do.
The U.S. Court of International Trade (CIT) had ruled on May 28 that the sweeping tariffs imposed by his administration are illegal. The decision by the New York-based court follows a series of lawsuits that argued that Trump’s so-called reciprocal tariffs exceed his presidential authority. The CIT’s ruling affects the tariffs that Trump imposed under the International Emergency Economic Powers Act (IEEPA), which gives the president some power to regulate commerce after declaring a national emergency.
Note that the sectoral tariffs on autos, steel, aluminium, and copper have been put in place using a different legal authority, Section 232 under the Trade Expansion Act of 1962. These tariffs would remain in force even if the Supreme Court upholds the rulings of the Court of International Trade and the Appellate Court.
Will the Supreme Court, in its decision on the appeal announced by the US government, strike down the earlier court rulings? Based on previous experience with the Supreme Court when it comes to restricting the President’s authority to impose tariffs, the answer may well be “no”.
As promised, the poll from above is back – let your voice be heard!
Leave a Reply
You must be logged in to post a comment.