NZ has capacity to weather shocks

The European sovereign debt crisis and Canterbury earthquakes were two bad jolts to the New Zealand economy in 2011, but the economy and financial system have the capacity to weather such shocks, Reserve Bank Governor Alan Bollard said today.

In a speech to the Canterbury Employers’ Chamber of Commerce in Christchurch, Dr Bollard said both events had important economic implications and had created uncertainty. While a clearer picture of the future is gradually emerging, we are moving from ‘unknown unknowns’ to ‘known unknowns’, he said (http://www.rbnz.govt.nz/speeches/4659119.html).

Nonetheless, the effects of both shocks could continue to rumble on for some time.

“New Zealand’s geographical isolation is no protection from economic events abroad. If major world economies have a significant economic problem, then that is going to affect us too, as New Zealand has seen in our export commodity prices, currency, and funding our foreign debt,” Dr Bollard said.

While New Zealand’s financial institutions depend on global credit markets, including Europe, for funding, there are buffers in place to ensure our banking system has adequate liquidity and capital, and the Reserve Bank has appropriate tools, more so than in the 2008 Global Financial Crisis.

Dr Bollard said ‘unknowns’ also remain in quantifying the effects of the Canterbury earthquakes. However, the domestic economy had proven relatively resilient to the challenge posed by the quakes, he said.

“New Zealand is well-placed in that insurance will fund the majority of the costs of the Canterbury earthquakes, and most of this funding comes from large offshore reinsurers. New Zealand is unusual in its degree of insurance and re-insurance. In other parts of the world, such as Japan, government, businesses and households have borne a much greater share of disaster costs.

“The challenge for all of us, policy-makers and business people alike, in 2012 will be to deal with these ‘known unknowns’, to get on with economic activity and to help Christchurch and New Zealand grow,” Dr Bollard said.