Business cycle review, 1998-2011

This article analyses New Zealand’s economic expansion from 1998 to 2007, the contraction that followed in 2008-09, and the gradual recovery thereafter. The expansion was long and large by the country’s post-war standards, while the contraction was marginally longer but shallower than the norm. An important driver of the expansion was a long and sustained rise in the terms of trade, in part reflecting expansion in the Asian region, especially China. A sharp rise in net immigration early in the period, a marked increase in the use of credit funded from offshore, and rising government spending were also important influences. The strong New Zealand dollar was another important factor, eroding competitiveness in parts of the tradables-producing sector and helping fuel demand for non-tradable goods and services. Balance sheets of households, farms and businesses became increasingly stretched over the period, a factor that has dampened the speed of recovery over the past three years.