Lack of savings puts New Zealand at risk, says Brash

3:00 pm

The Reserve Bank is warning that running current account deficits for long periods means building up debt to foreigners, and that carries risks for the New Zealand economy and New Zealand households.

In a speech to the Canterbury Employers' Chamber of Commerce today, Reserve Bank Governor Don Brash said: "The more indebted we are - as individuals and in aggregate - the less resilient to adverse economic shocks we are and the higher the potential vulnerability."

Dr Brash told the gathering that most mature and highly-developed economies in Europe and North America are either net lenders or have financing from abroad equivalent to only 20 to 30 per cent of their GDP, whereas New Zealand's net use of foreign capital is nearly 80 per cent of our GDP.

Dr Brash said a very high reliance on foreign capital could be justified if it generated exceptional economic growth, but in New Zealand that was not happening.

"The culprit has been the private sector - and New Zealand households in particular.

"The share of their incomes that New Zealand households are saving has fallen away very markedly.

"Fifteen years ago, our household saving rate was not too bad by developed country standards. But by 2000, we had slipped down to the bottom of the OECD developed-country class.

"By that year, our households were, in aggregate, spending more than their income. The OECD average saving rate that year was 8.4 per cent."

Dr Brash said that of the developed countries assessed, New Zealand had the lowest ratio of household wealth to household income.

"One obvious area of risk is that those who are providing the finance from abroad may reassess their willingness to go on doing so.

"A sharply increased cost of overseas finance, for example, could dramatically alter the situation facing many New Zealand households."

Dr Brash said there were many good things about the New Zealand economy, such as a floating currency, a sound macroeconomic policy framework, low inflation, fiscal surpluses, and relatively low public debt.

However, New Zealand's indebtedness meant vulnerability, which "underscores the great importance of a sound macroeconomic framework for fiscal and monetary policy, and of robust and well managed banks."

Full text of Dr Brash's speech