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Economic Imbalances: New Zealand's Structural Challenge WP 11/03

1  Introduction

Increases in New Zealand's offshore and private debts are features of New Zealand's economy going back at least 30 years. This build-up in debt reflects persistently higher investment than saving (income less consumption) at a national and private sector level, particularly households. These trends, together with farm and house prices having moved significantly away from historical long-term average levels, are often represented as indicating that the economy has significant “imbalances”.

Despite these imbalances having reached relatively high levels, New Zealand's economy has remained relatively resilient to financial crisis and global economic cycles. Nevertheless, economic imbalances now have a greater profile both in New Zealand and internationally given their relationship with the recent global financial crisis (GFC).[2]

The Treasury is concerned about significant threats to New Zealand's growth prospects. Therefore, of special interest to the Treasury, is that New Zealand shares some of the imbalance characteristics of the economies that fared particularly poorly in the GFC. However, New Zealand has not suffered the same fate through the GFC. The presence of imbalances in New Zealand did not magnify the adverse economic impacts of the GFC as it did for some countries, although they are impacting on how quickly the economy is recovering from the recession. The reasons for this outcome need to be understood to know whether this resilience can endure.

In general, the Treasury has been considering imbalances more over the last few years. Building on work made public in 2005 (Treasury, 2005) and 2007 (Treasury, 2007), in 2010 the Treasury published a discussion document (Treasury, 2010b). The purpose of that document was to assist the independent Savings Working Group in examining options to strengthen national savings (Savings Working Group, 2011). A key issue for the Treasury discussion document was the link between national saving and imbalances, and to discuss the range of policy options to address national saving and imbalances.

This paper is part of a package of Treasury publications that consider a range of contemporary macroeconomic challenges. It examines:

  • the nature of New Zealand's imbalances, and their connections and drivers;
  • associated risks that stem from the imbalances, and the factors that contribute to, or detract from, New Zealand's resilience;
  • whether New Zealand's resilience is sufficient by drawing on parallels with the recent international GFC experiences;
  • plausible scenarios that could eventuate if imbalances continue to grow unabated; and
  • options to further increase resilience.

These are important issues that need to be researched over time. This paper is part of that process. A further exploration of these issues will be likely in the context of the June 2011 joint Treasury, Reserve Bank of New Zealand (RBNZ), and Victoria University of Wellington macroeconomic policy forum “New Zealand's Macroeconomic Imbalances - Causes and Remedies”.[3]


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