By Bernard Hickey
The grand plan is in shreds
Prime Minister John Key, Finance Minister Bill English and Reserve Bank Governor Alan Bollard have been beating the drum for more than two years that New Zealand's economy needs to rebalance towards exporting and investing and away from consuming and borrowing.
The widely-embraced theory is that New Zealand will reduce its current account deficit by exporting more and borrowing less. The long term decline in exporting jobs will be reversed and the economy will naturally rebalance to a more productive and sustainable state where businesses invest to create higher wage jobs. This will improve real wages and help narrow the gap with Australia.
The Reserve Bank and Government even indicated earlier this year that the strategy was working. They pointed, rightly, to an improving current account deficit and the end of a flood of foreign borrowing to buy rental properties.
They also pointed to a surge in export returns as commodity prices rose and a slowdown in imports as households pulled in their heads and stopped spending like drunken sailors. Both the government and the central bank have acted to help the rebalancing process along.
The Reserve Bank introduced a secondary monetary policy tool called the Core Funding Ratio that forced the Australian-owned banks to rely more on local term deposits and long term bonds to fund their lending. This helped reduce our short term foreign borrowing and staunched the surge of cash into the housing market.
The government increased the GST rate and tweaked the property taxation process to encourage more saving and to discourage the 'wrong' type of property investing fueled by foreign borrowing. It seemed to be working, but it's now clear the grand plan has been shredded by a combination of factors that are apparently beyond the control of the government. The first shredder is the US Federal Reserve's policy of Quantitative Easing or money printing to weaken the US dollar and try to kick-start the world's largest economy.
This pre-emptive strike has destablised a currency system that was created in 1944 with the US dollar as the reserve currency. Competitive devaluations have unleashed an every-man-for-himself approach that could see trade barriers and capital controls erected to protect national interests.
The New Zealand dollar has sprinted up to nearly 80 USc and in recent weeks the Trade Weighted Index has surged too, threatening the export recovery, particularly of those non-commodity exporters trying to sell to America and Asia. The second shredder is the surprising reluctance of New Zealand businesses and their banks to lend, borrow and invest.
The Reserve Bank's Financial Stability report out this week shows that bank lending to businesses continues to fall, despite better business confidence and the beginning of a recovery from the 2008 recession. Bank lending figures show that business lending has fallen NZ$9.3 billion since November 2008 to NZ$71.5 billion, while farm lending has risen NZ$4.9 billion to NZ$48.3 billion and housing lending is up NZ$8.8 billion to NZ$170.8 billion.
That means New Zealanders and the banks have actually increased their exposure to property by NZ$13.7 billion since the crisis while business borrowing has fallen by almost as much. That's not much of a rebalancing. Banks are even more reluctant to lend to businesses and are falling back on the tried and tested method of lending against land.
How can New Zealand possibly rebalance our economy when our high value export sector is being demolished and businesses are not borrowing and investing? The grand plan is shredded.
We need a new one.
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