This note assesses whether progress has been made towards rebalancing the underlying structure of New Zealand’s macroeconomy. We explore five influences driving New Zealand’s macroeconomic imbalances – tradable sector activity, the burden of inflation control, net external trade receipts, expenditure in the domestic sector, and the direction of finance.
We find that only one of these five influences has improved in a direction consistent with the rebalancing objective. The remaining four have moved in a direction that considerably worsens the macroeconomic balance situation.
We conclude that the underlying factors driving New Zealand’s macroeconomic imbalances have deteriorated considerably since 2008.
Further deterioration of these underlying factors will be inevitably reflected through the primary symptom of macroeconomic imbalances – i.e. a worsening in New Zealand’s net external debt position.
The external net debt position has improved over the past four years. However, Treasury in their latest (December 2012) Economic and Fiscal Update expect a further deterioration in NZ’s net external debt over the next four years. This suggests that the improvement in net external debt is cyclical, rather than a structural improvement in NZ’s macroeconomic imbalances. This is further supported by our assessment of the influences driving New Zealand’s macroeconomic imbalances.
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