New Zealand braces itself for long aftermath of debt increase

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New Zealand could be obliged to deal with the impact of the increase in private sector debt for quite some time, Reserve Bank Governor Alan Bollard has stated.

Speaking in Auckland, Dr Bollard explained that the constraints put upon the economy by weak growth in some of the world’s major economies were to blame for the wait.

“Private sector deleveraging is underway, but it is a slow, gradual process,” Bollard said in a speech directed at the Employers and Manufacturers’ Association yesterday.

Private sector debt amounted to 160% of GDP in 2009, which is more than double the ratio of 70% in 1990.

“The end of the credit boom came rapidly - annual credit growth fell from 15% to 2% in only 18 months,” he explained.

“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 added that governments, firms, farmers and households across many parts of the world accrued large quantities of debt in the last couple of decades.

“In a single country facing weak domestic demand, resources can switch relatively readily into sectors more reliant on external demand. But it is hard for that to happen in a large chunk of the advanced world all at the same time,” Bollard explained.

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