Debt deleveraging underway, but still a long way to go

New Zealand may be dealing with the aftermath of the large increase in private debt for quite some time, Reserve Bank Governor Alan Bollard said today.

In a speech to the Employers and Manufacturers Association in Auckland, Dr Bollard said governments, firms, farmers and households across many parts of the advanced world took on large amounts of debt in the last couple of decades. He noted that rapid increases in indebtedness have often foreshadowed a difficult period for the economy.

Fortunately, New Zealand avoided the sort of costly systemic financial crisis that a growing number of other countries faced, and while government debt had increased substantially it remained low by international standards.

“But it is fair to note that we have suspected for a long time that New Zealand’s private and external debts were too high to be sustained,” Dr Bollard said.

The accumulation of debt owed by individual firms and households, and borrowers disappointed that incomes and asset prices have not gone on rising as they expected are “clearly playing some role in the low rates of growth New Zealand has seen in productivity and GDP,” Dr Bollard said.

Private sector deleveraging is underway, but Dr Bollard said it is a slow, gradual process.

“In a single country facing weak domestic demand, resources can switch relatively readily into sectors more reliant on external demand.  But it is hard for that to happen in a large chunk of the advanced world all at the same time,” Dr Bollard said.

“As yet, not much of the expected rebalancing of the economy, particularly towards exports, seems to have happened ­– perhaps this should not be too surprising in view of the persistently high real exchange rate, itself partly influenced by the adverse international climate.”

“Even at an aggregate economy level it looks as though we could be dealing with the aftermath for quite some time yet.”