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The outlook for New Zealand’s economy in the medium term is good but the rebalancing act isn’t going smoothly, Reserve Bank Governor Alan Bollard said today.
Rebalancing was one of the main themes of his speech, The recovery, the aftershock and the economic future, which he gave to the Deloitte Tax Conference today.
Dr Bollard said the rebalancing process is happening worldwide.
As well as imbalances between the savers in the East and the borrowers in the West, there are also internal imbalances in countries such as New Zealand that need correcting, he said.
“Our own internal rebalancing is progressing, but very slowly,” Dr Bollard said.
“Substantial fiscal stimulus helped cushion the economy over the past few years. The fiscal deficit will need to be closed and private demand take over public sector support.
“Moreover, it appears that some of the fiscal deficit is structural and unwinding this support will subtract from growth for a number of years, with our housing market remaining weak, consumption impaired, balance sheets fragile and businesses remaining cautious.”
Private demand is still impaired, he said.
Dr Bollard said the “sad US housing story” is bad for New Zealand’s wood exports, the UK fiscal retrenchment is hurting our UK tourist numbers and the fragile Japanese recovery restrains our food exports.
However, he said the strong growth in East Asia and Australia has been encouraging and other countries such as Russia, Brazil, South Africa and the South American countries are also in this group.
He said New Zealand will benefit from rising demand for protein, particularly animal protein, in the growing middle classes in emerging markets.
“The other important positive pressure is from Australian growth. The Australian mineral boom is now well documented, and expected to continue, if not intensify.
“The drivers in China and elsewhere look reasonably sustainable and as a low cost producer, Australia appears better positioned than most to weather any reduction in Chinese prices.”
The medium-term outlook looks favourable, he said.
“In the meantime we see New Zealand continuing its recovery. The aftershocks identified so far, and other aftershocks yet to come, mean that this recovery could yet be a prolonged process.”