BUSINESSDESK: New Zealand may have to deal with the fallout of its increase in private sector debt for some time as the economy is constrained by weak growth in some of the world’s major economies, Reserve Bank governor Alan Bollard says.

“Private sector deleveraging is under way, but it is a slow, gradual process,” he says in notes for a speech to the Employers and Manufacturers Association in Auckland yesterday.

Private sector debt amounted to 160% of gross domestic product in 2009, more than double the ratio of 70% in 1990.

“The end of the credit boom came rapidly – annual credit growth fell from 15% to 2% in only 18 months,” Dr Bollard says.

“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.”

Part of the slowness in surmounting the debt load is the surprisingly tepid recovery in major global economies, partly driven by “the current idiosyncratic pressures in Europe”.

“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 says.

Much of the expected rebalancing of the New Zealand economy, towards the tradable sector, hasn’t happened and this may reflect the persistently high real exchange rate in the face of “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,” he says.