Lifting the Long-term Performance of the Economy
New Zealand's economic growth rate in recent years has been poor. Our economy had already slowed noticeably prior to the global shock impacting (Figure 1).
- Figure 1 - Trend growth
- Source: Hall and McDermott (2009), Statistics New Zealand, The Treasury
Getting back to strong growth is the only way to deliver the incomes and opportunities that New Zealanders aspire to.
Through the mid-2000s, a range of factors acted to constrain growth. An overheated domestic economy, fuelled by increasing government expenditure, gradually increased pressure on available resources and resulted in persistently high inflation in the non-tradable sector. Monetary policy tightened during this period, with higher interest rates encouraging the New Zealand dollar to appreciate.
Domestic demand was partially funded from high rates of borrowing, with household and agriculture debt rising sharply over much of the 2000s. This rise was more than matched by increasing house and farm prices, so that net wealth increased. However, house and farm prices rose well above fundamental determinants, such as income and farm returns.
A fall in national saving, led by households, contributed to a rise in the current account deficit to 8% of GDP on average from 2004 to 2008, before it fell during the recession. The savings of foreigners were increasingly used to finance these deficits, so that our net external debt position grew to $168 billion, over 90% of GDP.
