Stronger balance sheets for households, businesses, financial institutions and the government going into the pandemic contributed towards maintaining a sound financial system and yielding a faster economic recovery than following previous deep recessions, Deputy Governor Geoff Bascand says in a speech published today.
The ongoing global COVID-19 pandemic has been a truly unique shock to New Zealand and the world. Lockdowns and restrictions have sporadically shut down business activity, border closures have all but stopped overseas migration, and supply chain disruptions are pushing up costs across economies.
But despite the level of output in New Zealand falling by 10 percent in the second quarter of 2020, unemployment rose modestly and then fell much faster than expected. Economic activity and employment have recovered strongly in 2021 and business investment has increased faster than it did following previous severe recessions.
“The strong and effective macroeconomic policy responses played a big role in minimising the downturn and supporting the recovery.; Fiscal and monetary policy responses were more effective because of strong public and private sector balance sheets going into the pandemic,” Mr Bascand says.
‘Balance sheet strength’ is the ability of households, businesses and financial institutions to absorb shocks without becoming distressed or significantly restricting their activities. Historical experience tells us that high debt levels constrain borrowing and spending, hindering economic recovery from recessions.
The inter-connected nature of these sectors and their balance sheets has been important. The strong public sector balance sheet prior to the pandemic allowed a large fiscal response, which in turn supported the private sector. The sound private sector and financial sector balance sheets prior to the recession remained robust, supporting the effective operation of the financial system, enabling credit growth to respond swiftly and helping monetary policy to get to work and achieve its price stability and employment objectives in the face of a downturn.
While we are still in a period of economic uncertainty and disruption to global trade, travel and investment flows, the speech explores why we have seen a shorter recession and a more robust economic recovery than expected.
“We have learned that stronger balance sheets reduce the magnitude of a downturn and facilitate a stronger, faster recovery,” Mr Bascand says.
Te Pūtea Matua will take action as needed to ensure regulated financial institutions’ balance sheets are resilient to future stresses in the economy and financial system, and avoid being over-exposed to vulnerabilities that could arise from excessive debt in the household or business sectors.
