Tuesday, 31 March 2015

How fast has wealth been growing?

Yesterday I posted about some new data that the Reserve Bank has collated on household balance sheets. It's important stuff, and unsurprisingly other commentators have also been talking about it. As part of the Twittering I rushed in where angels fear to tread, and have subsequently had to shelter in a foxhole in No Man's Land while the salvoes fly over my head.

The debate is about showing the full picture of what has happened to household wealth (and not just sub-sets of the history), and also about the growth rate of household wealth (with some unspoken subtexts, I'm guessing, about who was in government when wealth grew slower or faster).

So in the interests of putting some facts on the table, here are two graphs. They both show the growth rates of GDP and household (net) wealth, and they go back as far as the wealth data do, so this is as full a picture as you can show. Both take rolling four quarter totals, to smooth out the quarterly statistical noise: a side effect is that you lose some quarters at the beginning. And both use year on year growth rates rather than quarter on quarter ones, again to smooth out the noise, which means you lose some more quarters at the beginning, and so the graphs start at December 2000 rather than December 1998 which is when the household wealth series starts.

The only difference is that the first chart shows nominal wealth (the headline dollar number that the RBNZ has calculated) and nominal GDP, so both are in dollars of the day, and the second chart shows real wealth (which is nominal wealth which I have deflated by the CPI) and real GDP (which is Stats data, using the expenditure measure). Both have their uses, and there's already been some cross-fire about which to use, but for many purposes I'd suggest the second graph is likely to be the more relevant. That said, you get much the same shape of growth profile in both cases, so I wouldn't die in a ditch over which one to reach for.

Here they are.

Year on year growth rates - nominal $ terms

Year on year growth rates - real terms

What can you say about these results? First, that wealth is a good deal more volatile than GDP, which is as you'd expect, as asset prices can move a lot across the business cycle. Second, that the current business cycle isn't as strong as the heady days of the early to mid 2000s: GDP is growing respectably at a 2.5-3.0% sort of pace, but it's not as strong as the 4.0-5.0% pace we saw in the early 2000s, and wealth is definitely growing more slowly that it did back then. If people can see other trends in there, let us know.

As for who might get credit or blame, I'll just say what I said in a different context a few days ago - I was talking about jobs but it's as applicable here - that "voters these days know that governments don't create jobs (or not the bulk of them, at any rate). Governments can often, and fairly, take credit for allowing or facilitating or improving the environment for job creation, and that's no small thing: just look at all the counter-examples, from France to Venezuela, where governments have been incompetent managers of the macroeconomic environment. But job creation itself? Nah".

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