Geoff Bascand: The contribution of strong balance sheets to New Zealand's economic resilience and recovery from the pandemic

Speech by Mr Geoff Bascand, Deputy Governor and General Manager of Financial Stability of the Reserve Bank of New Zealand, to the Citi Australia & New Zealand Investment Conference 2021, 14 October 2021.

Central bank speech  | 
16 December 2021

The ongoing global COVID-19 pandemic has been a unique shock for New Zealand and the world. Lockdowns have sporadically shut down business activity, border closures have all but stopped overseas migration, and supply chain disruptions are beginning to push up costs across economies. Yet, it is also what has not happened that has been notable. Despite the level of output in New Zealand falling by 10 percent in the second quarter of 2020, unemployment rose only modestly and then fell much faster than expected over the second half of 2020 and the first half of 2021. Against almost all expectations of a decline, house prices increased strongly; and non-performing loan ratios appear to be ignoring COVID altogether. This is in stark contrast to previous experiences of severe economic downturns in New Zealand.

Fiscal and monetary support have played a major role in supporting the economy. The Government provided extraordinary support through schemes such as the Small Business Cashflow Scheme and the Wage Subsidy – enabling businesses to retain employees and filling much of the hole in business and household earnings. Historically low borrowing rates facilitated by monetary policy supported the cashflows of businesses and households and boosted asset prices and investor confidence.

The inter-connected nature of these sectors and their balance sheets is very 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.