New Zealanders need to save more even at the cost of lower growth in the short term, the Reserve Bank says.In its biannual Financial Stability Report, released this morning, the central bank governor Allan Bollard says the country's financial system
New Zealanders need to save more even at the cost of lower growth in the short term, the Reserve Bank says.
In its biannual Financial Stability Report, released this morning, the central bank governor Allan Bollard says the country’s financial system is stable but high debt levels mean the economy “remains exposed to changes in the cost of debt in international markets.”
The fallout from instability in countries such as Greece adds to the urgency of this, the report suggests.
“A rebalancing of the economy toward higher national savings and less reliance on external financing, remains highly desirable to stabilise New Zealand’s net external indebtedness at or near current levels, even if it means growth rates will be relatively moderate in coming years.”
Thus far, the country’s response to the recession and the slow recovery since the second half of last year has been to increase savings. Households have, as a group, paid down debt and also increased their quantum of savings, and household credit growth, coming out of the recession, has been “modest,” the report says.
Businesses are also taking a cautious approach – like the household sector, firms are “preferring to repay debt and reduced gearing.”
However, these changes are relative.
“While the end of the recession signals a decline in the credit risks associated with New Zealand households and firms, the private sector remains heavily indebted, which presents a vulnerability for the financial system.”
The one area of the economy not reducing debt s the government. The report notes New Zealand’s fiscal deficit is low compared to most other countries but also that the degree of shift, because it was from a position of large surpluses, is broadly in line with that of most other OECD countries.
Government debt is scheduled to continue to grow over the next few years and an improvement is “essential,” the report says.
“Fiscal consolidation would help to encourage rebalancing of the wider economy by taking some pressure off monetary policy and the exchange rate in the medium term.
“A credible long-term fiscal strategy also remains important in light of building demographic pressures related to the aging New Zealand population.”
