KEY POINTS:
While caution is natural in times like these "we should also be watchful for the opportunities and mindful of the risks of defeatism", Reserve Bank Governor Alan Bollard says.
In his annual speech to the Canterbury Employers Chamber of Commerce yesterday he said the global economy would be extremely weak for most or all of this year, at least.
But compared with many western countries New Zealand was well placed to weather the storm, he said.
It had flexible product and labour markets, and a floating exchange rate which had acted as an effective buffer against the shock of plunging commodity prices.
"Our banking system is well-capitalised, vanilla, and mortgage lending is generally on good credit quality," he said.
But the crisis had exposed vulnerabilities on the other side of banks' books - their need to fund domestic lending by borrowing overseas, mostly through short-term commercial paper issues which need to be renewed every few months.
"Part of the price of that renewal, when offshore investors are both skittish and there is little cash around, is that the terms must become more attractive to the investors, through some combination of a lower exchange rate and higher premiums on credit to New Zealand."
The tightening of credit markets had exposed the risks of having high levels of household and external debt.
"We need to recognise the underlying large structural adjustments under way. The debt build-up will take years to prune back down to sustainable and prudent levels."
Bollard called for restraint and realism on the part of business and labour in setting prices and wages.
"The more that the domestically generated part of the economy's cost structure can be kept under control, the less pressure there will be for the burden to show up in reduced employment and output."
He repeated his plea on Thursday for households and businesses not to reduce their spending unnecessarily and for banks to continue to lend on sound business propositions.
"Our challenge will be to remain well-positioned to take advantage of the economic recovery when it arrives possibly suddenly and strongly, which has been New Zealand's experience in the past."
