Editorial: Investment boost needed for recovery

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

Opinion

The Reserve Bank's latest financial stability report reflects the continuing uncertainty of the global and local economies.

The local outlook is brighter than the global picture, but ultimately both depend on the answer to one question: can the United States afford the stimulus it is receiving?

Financial markets think the answer is no, and their consequent devaluation of the US dollar is putting a cloud over the New Zealand economy and others.

The US central bank is putting yet more liquidity into its stalled economy despite the considerable monetary and budgetary stimulants it has received since 2008 and the lack of a credible plan to tackle the projected budget deficits.

The high exchange rate against a weak US dollar is denying New Zealand farmers much of the value of today's strong commodity prices and inhibiting the export-led recovery the country needs. All other conditions are set for that sort of recovery.

Households are living within their means, reducing debt. House sales have stalled, and the Reserve Bank sees signs of prices falling again.

Farms and other business have been reducing debt, and banks and surviving finance companies have reduced their exposure to property.

But the bank's report remains devoid of references to increased investment in New Zealand's productive sectors. The recovery is "tepid" and the report, largely compiled last month, confirms the impression that the momentum has slowed.

We have the good fortune to have markets in Australia and Asia that are enjoying strong growth, particularly in China. The region's growth is already above its rate before the global financial crisis.

Now the pressure is on China to sustain its pace with increased domestic consumption in place of exports to the languishing economies of the US and Europe. Thankfully, our dollar remains fairly stable against Asian currencies and has fallen against the Australian dollar.

Europe's budget deficits are as worrying as Washington's but the European response is now different. Britain and others are beginning to reduce their spending despite the weakness of their recovery.

They clearly believe their economies stand to suffer more in the long run from unsustainable deficits than they stand to gain from a continued stimulus.

The US Federal Reserve has made the opposite decision. One or other may be vindicated in a year or two. But only one. The world needs both its richest economies to pick up their pace.

The Euro zone has come through a debt crisis in some of its own economies this year, though the Reserve Bank notes that the rescue of Greece has done little to solve its rising debt.

New Zealand's sovereign debt has also risen since the crisis, and while the Government has had little difficulty raising money in foreign debt markets its cost of borrowing has risen in recent months.

The Government is running deficits on top of a large external debt inherited from decades of private sector deficits and low domestic savings. Creditors retain confidence in us, but the bank warns yet again that the country is vulnerable to a sudden change of market sentiment.

While the private sector's contribution to our external debt has fallen since the crisis, that has been largely because of a decline in foreign investment. The bank says a sustained improvement in domestic savings will be needed if the debt is to be brought down to safer levels.

Measures to improve national savings for investment are expected to feature in the Government's Budget next year. By then, the country needs to be seeing new fields of investment too.

The recession cleared the decks for economic change, the recovery still needs to point investors in new directions.