Last week saw an increased focus among officials on the prospects for recovery in New Zealand, and the accompanying risks.
In a speech on Tuesday, RBNZ Governor Bollard said there are early signs that the global economy is starting to recover, and noted that New Zealand could recover more rapidly than many of our major trading partners. As detailed in our latest quarterly Economic Overview, also published last week, we share this assessment. The prospects of a more rapid exit from recession in New Zealand reflect the fact that the initial drivers of the recovery are likely to be home-grown – in particular, surging population growth and residential construction.
However, Dr Bollard noted that the recovery could displace another important factor for the economy: rebalancing. The recession has seen a dramatic slowing in the rate of growth of household debt, and an increase in precautionary saving.
But the RBNZ sees a risk that as the economy recovers, households could return to their previous borrowing and spending patterns, perhaps spurred on by rising house prices. While this isn’t a new concern – it was proposed as an ‘alternative’ scenario in the June Monetary Policy Statement – the amount of attention it has garnered in recent weeks suggests that the ‘alternative’ is becoming more of a ‘central’ view.
These concerns about a return to unbalanced growth were echoed to varying degrees last week by Prime Minister Key, Finance Minister English, and – less encouragingly – by ratings agency Fitch, who surprised the market by placing New Zealand’s long-term credit rating of AA+ on negative outlook. Fitch’s assessment went a step further, noting the risk that overseas investors could demand higher returns in order to keep lending to New Zealand, leaving the country in a trap of high interest costs and low growth potential.
