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Big changes afoot in the world economy

27 January 2006, 1300 hours

Big changes afoot in the world economy

Big changes occurring in the world economy could impact significantly on New Zealand's competitiveness and ultimately its economic performance, Reserve Bank Governor Alan Bollard said today.

In a speech to the Canterbury Employers' Chamber of Commerce in Christchurch, Dr Bollard identified three major global developments that are making a significant difference to the pricing of particular goods and services.

These developments are:

* The integration into the global economy of China and other emerging market economies with large reserves of labour.

* An increased 'premium' placed on security, arising from geopolitical and bio-security considerations, global warming and acts of nature.

* A housing boom in some OECD countries.

"New Zealand has been growing strongly over the last decade, driven by improved efficiency, high participation and stronger terms of trade," Dr Bollard said. "Ultimately our future performance will depend on our ongoing relative competitiveness. These big global changes have the potential to impact that in a significant way."

The integration of China and other emerging economies had improved productivity in the global economy and made capital more available. In particular, the production and distribution of manufactured goods had become cheaper.

"In New Zealand - like most OECD countries - we have known for some time we cannot compete across a range of general manufactures with the big low-cost producers," Dr Bollard said.

The trend had been good news for household and business consumers, but the price of resources had increased, particularly oil.

"On balance, we have had good news: strong commodity prices for much of our primary sector, and a significant improvement in our terms of trade" Dr Bollard said. The price of global security had also increased. "New Zealand is by no means immune to personal and environmental risks, but on balance our isolation and vigilance to bio-hazards has largely protected us from these, enhancing our competitive position in food production, tourism and education," Dr Bollard commented.

Dr Bollard commented that there had been a big adjustment to OECD balance sheets from the housing boom. This phenomenon also carried significant risks, leaving New Zealanders highly leveraged within a world of growing imbalances. Dr Bollard said the Reserve Bank had put considerable effort into ensuring that New Zealand's financial system remained robust in the face of shocks.

"But New Zealand has a challenge ahead as it learns to reduce household debt and work down its deficit with the rest of the world."

Dr Bollard concluded that the big global changes were hard to assess in the short-term, but were probably bigger than most New Zealanders had seen in their working lives.

"There is some good news for New Zealand's international position in the medium-term, but some big policy challenges to adjust in the short-term. For business and households, acumen and agility will be rewarded as the world changes around us," he said.

A copy of the paper 'Major Global Developments in the New Millennium' by Dr Alan Bollard and Mark Smith prepared for the address to the Canterbury Employers' Chamber of Commerce can be found on the Reserve Bank's website:


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