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.More informationSpeech: The contribution of strong balance sheets to New Zealand’s economic resilience and recovery from the pandemic