The last couple of weeks have seen: the Reserve Bank Governor restate the need for New Zealanders to change their borrowing habits; suggestions that the recession is almost over; a credit rating agency put a negative watch on New Zealand; and a bank suggest that it may again lend more than 80% of a house's value.  Muddled could be one response to these events.  Despair coudl be another.
 
Firstly, as to credit ratings, the integrity of this system must be at question.  Twenty years ago New Zealand was rated at AA- when we recorded an annual trade surplus of +1.5% of GDP.  Since then our net foreign debt has reached 98% of annual GDP, non-housing investment has stalled at 16.5% of GDP, and the annual trade balance stands at a deficit of 1.6% GDP.  Yet our credit rating is now better, at AA+.
 
New Zealand commentators and business advisors continue to respond to the prognosis of the ratings agencies.  Consequently, behaviour and policy options continue to be framed around "what the ratings agencies might think".  We would question this and ask, instead, wouldn't it be better to frame behaviour adn policy around the needs of the New Zealand economy and it's businesses?  Especially when the role of the ratings industry in the meltdown of the global financial markets is considered.
 
Secondly, suggestions that New Zealand's recession is almost over may well be technically correct.  But issues related to our export performance, skills training, and productivity remain.  Arguably, these issues are far more pressing than whether the recession is over or not.
 
Thirdly, the idea that banks can again loosen mortgage lending criteria suggests  the need for an overhaul of banks' lending-to-deposit ratios.  Oversight and/or direct regulation of these reatios must be re-visited.  The last thing the New Zealand economy (and its people) needs is another surge in asset (house) prices that are unrelated to any change in productivity, income or earnings potential.
 
And that is precisely what the RB Governor is trying to say - albeit in a more diplomatic tone.  The Governor's comments did not shed light on any new discovery - just a restatement of what has been known already.  "A clear risk over the medium term is that households resume their 'borrow and spend' habits before they have paid down some of their existing debt.  This could be triggered by renewed moderate house price inflation, and needs to be avoided."  We couldn't agree more.
 
The tradable sector, investment and productivity
 
But we trust that there will not be a misguided repeat of prveious efforts to co ntrol house prices via interest rates.  Such efforts, if they were pursued again, would be a catastrophic repeat of past mistakes.  Needless to add, the impact on the wealth-generating and income-earning export sector would again be negative.
 
We need to consider a much wider basket of instruments - a "macro-purdential" toolkit, is what the Bank of England Governor recently called for.  Our toolkit would look different to others, but must include some control over credit growth to stave off unsustainable house price inflation.
 
Only then will "increased household saving ... have the added advantage of providing a more stable source of funds for business investment and expansion, reducing reliance on foreign funding."  Of course, as the RB Governor pointed out, a level for the NZ$ that better reflects the needs of business and the tradable sector would also help.  In particular, "...stronger world demand and a weaker New Zealand dollar would provide the signal that investment needs to move to the tradable sector...".
 
Unfortunately, without a significant change in the exchange rate framework we won't be holding our breath for such a level to become established, and remain stable, for the necessary length of time.
 
And, without a significant change in the interest rate and monetary policy framework, the signals for investment in teh productive sector are unlikely to change from those seen over the past 20 years.  And without such investment, the much desired lift in productivity will be conspicuous by its absence.
 
So, we trust that those apointed to the new Productivity Taskforce are not blinded by the received wisdom of the past 20 years.  We also hope that they will consider the necessary changes to the exchange rate/interest rate/monetary policy framework that has been a central element in constraining New Zealand's past productivity performance.
 

(Source: Berl Monthly Monitor)