4.3 Slow growth
Even in the absence of financial crisis, high levels of debt can still be a cause for concern. A specific shock in the property market, or more general concerns about the economic environment, could cause households to become apprehensive about their financial position. This could lead to a sharp reduction in private consumption to facilitate faster debt repayment, which if widespread enough would be associated with sustained slower economic growth from less private consumption. Furthermore, slower growth could also lower private investment as profitable opportunities reduce, feeding through into lower potential growth as labour productivity growth attenuates.
With this overall economic slowdown, unemployment could rise because growth may fall below potential for a sustained period. The cost of higher unemployment could be exacerbated if certain sectors of the economy associated with specialised skills shrank particularly quickly, creating a pool of unemployed that may find economic reintegration challenging (hysteretic-type effects). However, large-scale voluntary debt repayment reduces the likelihood of a sudden financial crisis.
It is possible, that through the stalling of domestic activity, less inflationary pressures could lead to an easing of monetary conditions that would be beneficial to growth in tradables and private investment. This could help offset the fall in private consumption. However, this may not be possible because of persistently poor international competitiveness from an unresponsive high real exchange rate. This may be due to atypical global factors that effectively prevent a deep and durable fall in the exchange rate and so reducing growth opportunities. Moreover, New Zealand's ability to quickly expand tradables as competitiveness improves is limited. The dominance of agriculture to New Zealand's export base means growth is driven more by biological and resource constraints than opportunity. This would leave government consumption or investment as the remaining source of demand, the feasibility of which is currently limited given the structural fiscal deficit.
