"Make us good, but Lord not right now."
That was Alan Bollard's rueful comment to a Parliamentary Select Committee this week after his decision to hold the Official Cash Rate at 3%.
He was talking about New Zealanders finally being 'good' about reducing their debts, but that this new-found austerity was hampering the recovery.
The Reserve Bank Governor just can't seem to get away from the perfect storm of debt that hit New Zealand's economy between 2004 and 2007. Back through 2004 to 2007 Bollard was struggling to keep a lid on inflation and housing market. His main tool, the Official Cash Rate, was deadened by New Zealanders love of fixed mortgages fueled by cheap foreign debt.
Now that same tool has been robbed of its potency by that same foreign debt, but this time on the other side of the ledger. Now New Zealanders are very reluctant to do what they did during previous recoveries. Even though confidence has bounced back from the depths of 2008, spending on consumer goods and new plant and equipment has stayed stubbornly low.
Even the banks are frustrated that consumers and businesses seem to have lost their mojo to take on fresh debt to spend and invest. Whereas the Reserve Bank was grumpy through early 2009 about the banks being reluctant to lend and charging relatively high floating mortgage rates, now even the central banks acknowledges the issue is not enough demand for new debt, rather than any restriction of supply of debt from the banks.
It's as if the nation has collectively taken a big breath and buckled down to repay the debt.
The trouble for Dr Bollard and the New Zealand economy is that this is stunting our recovery. Unfortunately for New Zealand and the rest of the developed world, this was inevitable. It is literally the hangover we had to have after the biggest party of the century.
The debt is remorseless.
Without an inflationary surge or a restructuring, it just will not go away. And borrowers sense this in their bones. Having just had the fright of our financial lives, New Zealanders realise that a debt to disposable income ratio of almost 160% is just too high.
That we are paying it back is not too surprising, but the speed and the ferocity of the repayment has taken the Reserve Bank and many banks by surprise. It is driving (a lack) of activity in the housing market, as shown by figures this week from the Real Estate Institute of New Zealand showing sales volumes down 26% from a year ago. Mortgage approvals are down by exactly the same amount.
It is no coincidence. Just as retailers and property investors celebrated the Tsunami of debt surging through their tills and into house prices from 2004 to 2007, they are now seeing the tide wash right back out again.
And unfortunately, there is much more to come.
A 'normal' level of debt to disposable income of closer to 100% of disposable income has the potential to suck upwards of NZ$50 billion out of spending over the coming five years. Research into financial crises overseas found that deleveraging of debt after a crisis typically reduced a country's growth rate by as much as 2 percentage points if debt was above 90% of GDP before the crisis.
There is a lot more of this austerity to come from both the government and households. The Reserve Bank's decision to dramatically lower its forecast track for interest rates reinforced the scale of the task ahead. New Zealand is deleveraging, which means lower growth, lower asset prices and low interest rates for longer.
Sometimes being good hurts.
*This article appeared in the Herald on Sunday.