Bernard Hickey: Plan to rebalance economy shredded

Bank lending to business continues to fall. Photo / NZ Herald

Prime Minister John Key, Finance Minister Bill English and Reserve Bank Governor Alan Bollard have beat the drum for more than two years that our economy needs to rebalance towards exporting and investing and away from consuming and borrowing.

The theory is that New Zealand will reduce its account deficit by exporting more and borrowing less. The decline in exporting jobs will be reversed and the economy will rebalance to a more productive state, in which businesses invest to create higher-wage jobs.

The Reserve Bank and Government even indicated this year that the strategy was working. They pointed to the end of a flood of foreign borrowing to buy rental properties, a surge in export returns as commodity prices rose, and a slowdown in imports as households stopped spending like drunken sailors.

The Reserve Bank introduced a secondary monetary policy tool called the Core Funding Ratio that forced Australian-owned banks to rely more on local term deposits and long-term bonds to fund their lending. This helped reduce our short-term foreign borrowing.

The Government increased the GST rate and tweaked the property taxation process to encourage more saving and discourage property investing fuelled by foreign borrowing.

But the grand plan has been shredded by factors that are apparently beyond the Government's control. The first shredder is the United States Federal Reserve's policy of quantitative easing, or money printing, to weaken the US dollar in an attempt to kick-start its economy.

This pre-emptive strike has destabilised a currency system that has the US dollar as the reserve currency. Competitive devaluations have unleashed an every-man-for-himself approach that could see trade barriers erected to protect national interests.

The second shredder is the reluctance of New Zealand businesses and their banks to borrow, lend and invest. This week's Reserve Bank's Financial Stability report shows that bank lending to business continues to fall.

Business lending has fallen $9.3 billion since November 2008 to $71.5 billion, while farm lending has risen $4.9 billion to $48.3 billion and housing lending is up $8.8 billion to $170.8 billion. New Zealanders have actually increased their exposure to property by $13.7 billion since the crisis while business borrowing has fallen by almost as much.

That's not much of a rebalancing. How can New Zealand rebalance its economy when our high-value export sector is being demolished? We need a new plan.


bernard.hickey@interest.co.nz