'Make us good, but not too fast'

Private sector paying down debt faster than RBNZ predicted, Bollard says

16th Sep 10, 9:24pm by Alex Tarrant

Households and businesses are reducing debt faster than the Reserve Bank predicted in June, forcing the central bank to revise down its growth forecasts for the New Zealand economy, Parliament's Finance and Expenditure Committee was told on Thursday afternoon.

The RBNZ spent much of the past few years telling the private sector to restructure balance sheets, after a private boom in demand for credit saw foreign debt stream into the economy due to a low domestic savings rate.

Reserve Bank Governor Alan Bollard told the committee that households and businesses were now less confident about the speed of the economic recovery and the extent to which they would re-commit funds into spending and investment.

"They seem to have a view that they need to reduce debt to a greater extent than we had predicted in June," he said.

However the faster-than-expected rate of rebalancing would not mean a return to negative growth, he said.

"We all in this room would be looking for the New Zealand economy to rebalance, but in the words of the prayer, 'make us good, but Lord not right now'.

"The private sector in New Zealand is [rebalancing] a little bit faster than we had expected. That makes balance sheets look better but it makes growth stories not look so good.

"But in terms of moving the New Zealand economy toward retraction and recession, we think we're a long way from that."

Meanwhile, the large reduction in the Reserve Bank's interest rate forecast in its Monetary Policy Statement was 60% due to worsening economic news and 40% due to households being more cautious, RBNZ assistant governor John McDermott said

The central bank had revised down its 90 day bank bill rate forecast for March 2013 by around 140 basis points from its June Monetary Policy Statement to 4.7% in September.

ASB economist Jane Turner said this was in line with an Official Cash Rate around 4.5%, and suggested the peak in the OCR would be lower than seen in previous tightening cycles.

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13 Comments

by David George | 17th Sep 10, 6:51am 1284663093

"demand for credit saw foreign debt stream into the economy due to a low domestic savings rate"

This has more to do with our balance of payments problem Alex. Our banks issue debt first, the created money never really leaves the banking system as it is spent almost immediately . Except that is for what is spent on imports or returned as profits and interest to our foreign masters. The inflow of savings is to replace that loss from our banking system, not because of our lack of domestic savings.

Getting our current account into surplus should be front and centre for our Government.

by Philly | 17th Sep 10, 9:03am 1284671013

The reality is that our current account deficit has simply gone from over 8% to over 2%

http://www.rbnz.govt.nz/keygraphs/Fig6.html

So, we are are still spending more than we earn as households and as a country. You can't keep doing that forever. We have actually done that every year since 1973. Over a third of a century ago. At some stage you have to go cold turkey and reduce your consumption to below the level of your income.

The only other alternative is to grow your exports and productive economy. However, a country that still believes that the one investment class is tax-free capital gains thru property (rentals and farms) rather than productivity means that is impossible..

So cold turkey it has to be.

by I am Bulger | 17th Sep 10, 5:09pm 1284700175

Sorry but your need to look at the whole picture and it's more complex than deficit = bad, surplus = good.

For some reason you also try to relate this back to an individuals spending vs saving but in reality this current account deficit is driven by two main things exchange rates (FX) and interest rates. John spending more than he earns has little to do with it

If we fixed the NZD to say NZD0.40c / USD1.0 the account deficit would be solved in a couple of years.

Rather than watching the players in the game, try understanding who's making the rules and who's selling the tickets. Then you will find your answers...

by Number 6 | 17th Sep 10, 5:31pm 1284701502

Fix the kiwi @ .4 and wave goodbye to any export receipts you may factor into your equation. The cost of fuel ( an other assorted importables) will knacker the production costs of this country.

by noponies | 17th Sep 10, 7:00pm 1284706810

Peak Oil will do that for you, regardless.

by Billy | 17th Sep 10, 10:47am 1284677226

Households and businesses are reducing debt faster than the Reserve Bank predicte

Why do I get the impression that the Reserve Bank thinks this is a bad thing?

by steven | 17th Sep 10, 4:33pm 1284697985

Because it has the potential to send us into a recession/depression....its catch 22, on the one hand they want less debt and more savings and on the other spending is a huge % of our economy.....not only that that spending keeps our un-employment down as it seems the % of debt is closely related to the % of un-employment....if we save and pay down debt that could easily climb significantly.

Worse its self-perpetuating..........

Worst of all no one at all has a plan or economic model that does not include growth and that growth has to be by way of consuming more of the planet's resources.....So we are on a finite planet, what happems to our system when we cant grow anymore?

Is what we are seeing symptoms of that? yes I think so.

regards

by Wolly | 18th Sep 10, 8:38am 1284755934

Bit like the time the first steamship on the Liverpool New York run ran out of coal and they burned the furniture...then the structure...and only just managed to creep into New York.

Noddyland runs on other people's munny and when we say 'runs on' we mean it pretends to generate real growth while in reality the economy is no more than a mirage...and so the debt to other people continues to grow along with the scale of deception and waves of BS spewing from wgtn.

Bollard knows Noddy is buggered but he won't say so...instead he promises to keep credit cheap for longer and longer...while warning that if by chance, by some fluke the economy should start to get stronger...he will have to make the cheap credit expensive and kill off any growth least the peasants demand more munny and the boogyman 'inflation expectation' pop out of the beer bottle.

by muzza | 18th Sep 10, 5:10pm 1284786633

Wolly, your world view seems very negative. I know it's fruitles to say so, as you can't change someone's world view once they have created their set of beliefs about something and they filter all information in relation to that worldview. There are a mixture of positives and negatives for NZ at present, pity you filter things to your negative view though.

by Sheep Shagger | 18th Sep 10, 8:56pm 1284800194

Here here muzza. Im all for everyone being intitled to their views but its a wonder Wolly/Wally can drag himself out of bed every morning such is the crushingly miserable outlook he has. Perhaps we should pitch in to send him somewhere where there really is problems like the flooded areas of Pakistan or war torn Darfur. Ive lived in Blenheim and really its not that bad!

by Gummy Bear Hero | 18th Sep 10, 9:10pm 1284801003

Come over here to Manila , Wolly . Spend a month or three in a squatters' camp . Live in tropical heat , with no air-con , no potable water , and open sewers . ............. And yet these folk don't bitch about it ! They rally around to help one another . They potter off to slave for a few pesos per day ............... And they smile through it all .

Geez Wolly , they'd trade their lot for your's any day ! Smile dude , it won't crack yer mug , really it won't .

by Christov | 18th Sep 10, 9:26pm 1284802004

hey u supposed to be on some kind of R n R....so git to it...! and git some pics fer us ....good ones too..... Enjoy.

by Gummy Bear Hero | 18th Sep 10, 9:36pm 1284802578

Hello Count of Christov : Just back from Cavite University . They have a great research station , breeding new fruits and rice varities .

Sad to see that the gloom pervading NZ , the land-of-the-long-white-face , persists ............ But maybe Wolly will take a holiday sometime .

It's all growth / bustle / and smiles around here ( Singapore/Thailand/Philippines ) . Gummy Bears to all of them !