Reserve Bank governor Alan Bollard says New Zealand’s debt hangover will linger:
In a speech to the Employers and Manufacturers Association in Auckland, Dr Bollard said governments, firms, farmers and households across many parts of the advanced world took on large amounts of debt in the last couple of decades. He noted that rapid increases in indebtedness have often foreshadowed a difficult period for the economy.
Fortunately, New Zealand avoided the sort of costly systemic financial crisis that a growing number of other countries faced, and while government debt had increased substantially it remained low by international standards.
“But it is fair to note that we have suspected for a long time that New Zealand’s private and external debts were too high to be sustained,”Dr Bollard said.
The accumulation of debt owed by individual firms and households, and borrowers disappointed that incomes and asset prices have not gone on rising as they expected are “clearly playing some role in the low rates of growth New Zealand has seen in productivity and GDP,” Dr Bollard said.
New Zealand households are finally saving more than we’re spending, but not by much. The need to earn before we spend is acknowledged but the debt grew over years and it will take years for it to shrink.
“We have a very highly indebted rural sector, no question, particularly our dairy sector,” Wills said in reaction to Reserve Bank figures which show agricultural debt has taken a sharp upturn in the first half of this year, sitting at the end of June at $48.3 billion.
The figures are particularly concerning because a new Farm Price Index developed by the Reserve Bank and the Real Estate Institute of NZ shows that farm prices have declined by 24.8 per cent from their peak in October 2008, while agricultural debt increased by 12.7 per cent over the same period (see chart).
A combination of high debt and falling land values could put pressure on farm balance sheets and is a particular concern because farm incomes have been falling due to lower commodity prices and the stubbornly high New Zealand dollar. . .
Wills said not all of the debt being taken on was bad, because some of it was being used to increase production by converting grazing land to dairying, which produced higher returns. But overall debt levels were too high.
“We now have higher rural debt levels than when the worldwide credit crunch hit in 2008, which is pretty concerning because we should have all got the message that we are carrying too much debt,” he said.
The last couple of seasons have been once-in-a-generation ones for almost all farming sectors. Only the very optimistic were expecting those high prices to continue and projected prices for the coming season could prove the pessimists right.
Dr Bollard’s speech is here.