A balancing act for New Zealand's economic recovery
Dr Bollard told the Wellington Chamber of Commerce that New Zealand has taken action to address some of its imbalances, but households and banks can do more to reduce risks inherent in the external imbalance.
Dr Bollard said the state of balance of the New Zealand economy can be viewed through four different, but inter-related, lenses: funding imbalances for banks, fiscal imbalances of the government, savings imbalances by households, and external imbalances.
Resilience of bank funding has been bolstered by a liquidity policy imposed by the Reserve Bank, and the Government accounts have a credible and improving track. But households remain the most obvious source of imbalance, with balance sheets heavily skewed to housing, high debt ratios, and very low savings.
"We believe New Zealanders have decided they are over-exposed to property assets and to high debt, and they are prepared to constrain consumption to improve their savings. The question is how much rebalancing they contemplate, and for how long."
On the external account, the trade balance has improved with strong export prices and less demand for imports from consumers, farmers and businesses. But a large deficit on the investment income balance is showing no signs of enduring improvement, and the strong New Zealand dollar has not helped.
"Indeed it will be difficult to improve this metric as it will require us to get our net external debt position on to a downward trend. The financing consequences of years of running external deficits mean that foreigners have more than twice as much invested in New Zealand as we have invested overseas.
"Our net external liabilities cannot keep increasing with impunity. Ultimately either the markets will penalise us by requiring a larger premium for its continued funding, and/or the sheer size of servicing our obligations will become an intolerable burden to the country. But rather than await such painful punishments, we should be looking to improve the situation.
"Some of this is largely outside our control, like the relative valuations of major currencies. But there is a lot that can be and is being done: designing fiscal and tax policy to reduce vulnerabilities, putting in place cautious bank regulation, and improving access to a range of investment opportunities. Ultimately, however, it is up to New Zealanders to improve the quantity and quality of household savings."
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