Tracking the Trends

Friday 2nd March 2001

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Capital goods prices

Annual average per cent change

Source: Statistics New Zealand

Real capital goods prices

Annual average per cent change

Source: Statistics New Zealand, NZIER estimates

TRACKING the ECONOMY

Capital goods prices keep rising

Figures released last week by Statistics New Zealand suggest the prices of capital goods are on the increase. The capital goods price index (CGPI) was 2.2% higher in the December 2000 quarter than in the September 2000 quarter.

The rise in the price of capital goods in the December quarter was the highest for the plant, machinery and equipment sub-group, reflecting the impact of the low New Zealand dollar on imports.

Capital goods prices for residential and non-residential buildings, which are essentially construction prices, increased less strongly, suggesting domestic price pressure in these sectors is subdued.

Compared with a year earlier, capital goods prices in the December quarter were 4.8% higher. This is the highest annual increase since the current survey began in the late 1980s. The chart below shows growth in capital goods prices for various sectors since March 1992.

So what does this mean?

On the face of it, a rise in capital goods should have a dampening effect on investment as firms or households postpone or cancel investment. But will this be the case?

For households, the decision to invest depends on many factors, including interest rates, house prices and income growth. When making the decision to invest, private investors often compare the relative cost of construction with earnings growth.

In the chart below we have deflated growth in residential building costs by growth in average hourly earnings. Between 1997 and 2000, residential building costs fell relative to income growth, although they are now rising.

Similarly with business investment, the decision to invest is generally based on a number of factors. One of these is the relative cost of investing compared with selling prices (or income).

This relative difference can be measured by deflating the CGPI by the producer price index for outputs (which reflects growth in selling prices).

The chart shows changes in the "real" CGPI for non-residential building and plant, with both series having been deflated by producer output prices. Real growth for both series is negative, indicating that relative to selling prices, these capital goods have in fact become cheaper.

This suggests, in the short term at least, investment in plant and machinery and non-residential buildings should remain steady.

But if firms are looking further ahead, they may hold back from investing because of expectations for future growth in earnings, especially given the likely impact of an Australian and US downturns on both export volumes and prices.

- Compiled by Lisa Yee

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