How is the New Zealand economy placed to withstand current global financial market uncertainty?
As I mentioned yesterday, we are continuing to see bouts of concerning economic news from Europe, and I expect that this will continue. The effect of this is to put every debtor country under the microscope. In particular, financial markets are asking whether debt levels are acceptable, whether there are plans to contain debt and get it down, and whether Government policies are helping or hindering growth. In this respect the New Zealand ship is in better shape than it was 3 years ago, but the seas are getting rougher, so there is more work to do.
How does New Zealand’s economic position compare with that of other countries?
Compared with similar developed countries we have come through the recession and on-going market volatility in reasonable shape. However, compared with developing countries with significant surpluses we are much more vulnerable to volatility in financial markets. However, looking ahead we have many opportunities, particularly to increase our trade and therefore our ability to earn higher incomes and create more jobs for New Zealanders by trading with countries in the Asia-Pacific region with fast-growing surpluses.
What risks does New Zealand face from the current global economic environment?
There are really two sorts of risk. One is financial market risk. New Zealand has high levels of external debt, mainly in its household sector, and we have to continually return to those financial markets to borrow more from them. If they are volatile that may make the borrowing a bit more problematic. The other risk we have is demand risk. That is, when those high-value markets such as the US, the UK, and Europe are facing financial volatility and a slow-down in growth, it is likely they will be less willing to pay the prices we want for our products. So that could flow through to a slow-down in the New Zealand economy.
What steps has the Government taken over the past 3 years to reduce our vulnerability to volatile global markets?
First, can I say that our exposure to these markets has built up over quite a long period of time—over the last 20 years or so, but particularly so since about 2005. It will take some time to get New Zealand back into a position where it is not vulnerable to these markets. In the meantime the Reserve Bank has taken a number of steps to ensure that our banking system is secure and well capitalised. The Government has taken significant steps to get its own debt under control and to encourage the household sector to get its debt under control.
Would narrowing the gap between New Zealand’s GDP per capita and Australia’s GDP per capita make the New Zealand economy more able to withstand global financial market uncertainty; if so, has the gap narrowed or widened since he took office?
I cannot answer the second question in detail, although it is likely that in the current calendar year the New Zealand economy will grow faster than the Australian economy, which tells us that we may be more likely to close the gap. But, certainly, if we were able to increase our savings and channel our investment into the tradable economy rather than reduce our savings and borrow money to fund consumption and housing bubbles, then we would be more likely to close the gap with Australia.