RTTNews - The New Zealand economy would begin to grow again towards the end of the year, but the recovery would possibly be slow and drawn out, the Reserve Bank of New Zealand Governor Allan Bollard said Wednesday.
At the same time, the recovery could also be erratic. To many households it may not feel like a recovery at all, with lower employment, house prices and wage increases into next year, the Governor added.
Bollard said firms and households would have to continue to make adjustments in the form of cutting back on spending to match the slower income growth. It was going to take a long time for households to balance their balance sheets, he said.
Further, given the size of the problem, the nature of the recovery both in New Zealand and overseas is highly uncertain. Potential growth rates around the OECD are likely to be lower, but just how much is unclear, he said.
Bollard noted that for the economic recovery and the subsequent expansion to be strong and long lasting, further economic re-balancing was necessary. Growth needs to be export and investment led, rather than consumption led. Household and government consumption need to be more restrained. Saving needs to increase, and the current account deficit needs to reduce.
However, the central bank chief said some recent developments in the form of the upward pressure on the New Zealand dollar was working against this re-balancing. He cautioned, saying that markets buying New Zealand dollar on hopes of a strong recovery may end up in disappointment.
According to Bollard, fiscal and monetary policies played an important role in boosting the domestic activity. He said banks could help by passing the reduction in interest rates to the short-term lending rates. We are disappointed that banks have not passed on the April reduction in the OCR to short-term lending rates: they have an opportunity to help New Zealand's recovery by doing so.
Meanwhile, Bollard also pointed out how a premature rise in household spending at present could jeopardize the next expansion, giving people the impression that the housing market has stabilized and leading to a large borrowing and spending. Moreover, it could hurt investors' sentiment and make it more difficult for businesses to invest in the export-led recovery the country needs, he said.
The central banker also warned that the widespread swine flu could delay the economic recovery process, as it will affect staffing, through sickness, childcare and precautionary behavior.
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