Bernard Hickey: Good can hurt

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

"Make us good, but Lord not right now." That was Alan Bollard's rueful comment this week after his decision to hold the official cash rate (OCR) at 3 per cent.

He was talking about New Zealanders finally being "good" about reducing their debts, but this newfound austerity was hampering the recovery.

The Reserve Bank Governor just can't seem to get away from the perfect storm of debt that hit New Zealand's economy between 2004 and 2007.

Through those years, Bollard struggled to keep a lid on inflation and the housing market. His main tool, the OCR, was deadened by New Zealanders' love of fixed mortgages fuelled by cheap foreign debt.

Now that same tool has been robbed of its potency by that same foreign debt, but this time on the other side of the ledger.

New Zealanders are reluctant to do what they did during previous recoveries. Even though confidence has bounced back from the depths of 2008, spending on consumer goods and new plant and equipment has stayed stubbornly low.

Even the banks are frustrated consumers and businesses seem to have lost their mojo. Whereas the Reserve Bank was grumpy early last year about the banks' reluctance to lend and charging relatively high floating mortgage rates, now even it acknowledges the issue is not enough demand for new debt.

It's as if the nation has collectively taken a big breath and buckled down, but this is stunting our recovery.

Unfortunately for New Zealand and the rest of the developed world this was inevitable.

Having just had the fright of our financial lives, New Zealanders realise a debt-to-disposable income ratio of almost 160 per cent is too high. That we are paying it back is not too surprising, but the speed and the ferocity of repayment has taken the banking sector by surprise.

It is driving a lack of activity in the housing market. Latest Real Estate Institute of New Zealand figures show sales volumes are down 26 per cent from a year ago and mortgage approvals are down by the same amount.

Unfortunately, there is much more to come. A "normal" level of debt-to-disposable income of closer to 100 per cent has the potential to suck upwards of $50 billion out of spending over the coming five years.

Research into financial crises overseas found deleveraging of debt after a crisis typically reduced a country's growth rate by as much as 2 percentage points if debt was above 90 per cent of GDP before the crisis.

The Reserve Bank's decision to dramatically lower its forecast track for interest rates reinforced the scale of the task ahead. New Zealand is deleveraging, which means lower growth, lower asset prices and low interest rates for longer. Sometimes being good hurts.