The economic recovery in New Zealand is proving "brittle, uncertain, and full of surprises", according to comments from Reserve Bank Governor Alan Bollard in the central bank’s 2010 annual report.
Compared to many countries, New Zealand was hit less hard during the global financial crisis, but any expectations of an easy recovery during this year had been dispelled, Dr Bollard wrote in the report which was released yesterday.
"We have now emerged from a long recession, and have experienced some quarters of significant growth," Dr Bollard said.
"This has been helped by growth in Asia and Australia.
"But Europe has disappointed with its frail fiscal picture, the US has suffered a very weak labour market, and Japan continues to struggle with deflation."
The commentary in the RBNZ report contrasts with that in Treasurer Wayne Swan’s speech in New York.
A lot of people forget in Australia that just as we depend more and more on China for our growth and prosperity, so smaller economies like New Zealand hang off Australia.
But there other similarities: the banking systems of both countries remained strong (mostly due to the fact that NZ’s biggest banks are Australia’s biggest banks), NZ’s financial company sector took a mortal blow (Australia’s disappeared 20 years ago) and interest rates remain under levels in past recoveries.
Mr Bollard said that the recession had "changed consumer behaviours as a result.
"Households have been reducing mortgage debt where possible, and have been very cautious about re-entering the housing market – attitudes that have been reinforced by recent tax changes. Businesses have also been reducing debt and cautious about reinvestment.
"This private sector restraint has meant a slower return to growth.
"But it has helped the rebalancing of the economy, which has been a growing challenge for a long time."
Interestingly Australia’s Reserve Bank thinks Australian consumers have changed their behaviours as well, saving more and spending less, points that have appeared in the recent Financial Stability Report and in recent minutes of board meetings and speeches from Governor Glenn Stevens and other senior officials.
Mr Bollard said the global financial crisis demonstrated the fragility of a banking system that relies so heavily on short-term foreign debt funding.
"It also highlighted New Zealand’s external imbalances, demonstrated by our deficit in the balance of payments on goods and services, and our negative net investment income position. These deficits are now slowly improving.
"Government spending, which was stimulative during the recession, is now more restrained.
"Monetary policy was also stimulative over the period of the crisis, and together with a number of special policies, this helped mitigate the worst of the effects.
"A temporary weakening of the New Zealand dollar also assisted recovery.
"Now, most of the crisis policies have been withdrawn or are time-limited, including most of the special liquidity facilities for banks and other institutions, the government’s retail deposit guarantee scheme, the wholesale deposit guarantee, and the Bank’s increased foreign reserves position.
"This means we can manage a return to normality through the traditional monetary policy tool, the Official Cash Rate (OCR).
"We have already moved to increase the OCR somewhat, but it still remains at a historically low level.
"Over time, the OCR will move back to more neutral levels, but this process will likely be slow, and the OCR is unlikely to need to rise as far as in previous recoveries.
"This is due to a combination of circumstances: the cautious behaviour of households and businesses; the low levels of new lending; the high cost of funds; the move back to floating rate mortgages; a different yield curve; contained inflation expectations; and the very low interest rate paths expected in most major economies."
