Investment Woes ?

Gareth MorganEconomics

Gareth Morgan, Director of Gareth Morgan Investments

Over the current financial year investment expenditure by businesses is likely to be 17% lower in real terms than in 1990/91. This projection is supported by import figures, which show capital plant and equipment purchases from abroad falling at between 30% and 40% per annum in nominal terms. And, remember, imports account for most plant and equipment supplies.

The fall in business investment spending is substantial and is no doubt of some concern to policy makers. Investment in new plant and equipment is regarded as essential to underpin future economic growth, so a slide of the magnitude already apparent suggests that any recovery in economic activity is likely to be anemic – not a palatable outlook for a government increasingly desperate to discover the elixir for this economy.

But should we really worry about the downturn in business investment spending? The answer is probably, no. The first point to make is that the ratio of business investment to GDP rose rapidly from 1989 through to the beginning of 1991. The decline that we are currently experiencing is from very high levels.

Some of the surge in investment spending was the final fling of the building and construction industry. Another significant contributor was the spending spree in the transport sector as Air New Zealand re-equipped and expanded its international fleet, Ansett arrived, there were new facilities and an upgrading of old ones and there was a minor boom in the car industry. The building and transport industries have discovered little use for some of their investment expenditure and have basically stopped investing. This is making a major contribution to the current slump in business investment outlays.

A second point justifying a relaxed attitude to the downturn in business investment is the abysmal state of plant utilisation. The latest data from the NZIER’s Business Opinion survey show that capacity utilisation of existing plant is at its lowest level in almost 30 years. It implies that at the moment businesses could increase their output by 15% without raising their unit costs because they have so much spare capacity. Its hard to argue that we need to rush out and buy more plant and equipment to meet overwhelming demand at the factory door.

Point number three relates to a possible and very desirable shift in business investment spending from physical equipment to marketing and human resources. It is frequently argued that our capital equipment is out of date and uncompetitive and we urgently need to replace it with more modern plant to produce products that consumers want. This contention undoubtedly holds true for some businesses and industries. However, one of the major factors limiting businesses performance may not be the amount and quality of its plant and equipment but its management, marketing and knowledge. The critical area of investment deficiency is more likely to be in human capital rather than physical capital. Expenditure on developing human capital is not measured as part of business investment and therefore looking at national accounts figures on investment tells only part of the story.

Investment Woes ? was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.