mr. brash asks how fast the new zealand economy can grow address by the governor of the reserve bank of new zealand, mr. donald t. brash, to the rotary club in auckland, on 6 / 10 / 97. introduction : economic growth is important ladies and gentlemen, i am delighted to be addressing the auckland rotary club today. just 15 years ago i was a member of this club, and i look back to that time with very warm memories. when i was invited to speak to you, i was given a clean slate : i was essentially allowed to choose my own subject. and i want to use that freedom to go beyond my usual territory, of monetary policy, interest rates, exchanges rates, mcis and all the rest, to talk about a broader issue, namely new zealand ’ s future economic growth - - what it may be, what is constraining it, and how it can be enhanced. and i want to do that for two reasons. first, because economic growth is the ultimate objective of much public policy, and that in turn because it is economic growth which gives us choices - - the ability to enjoy better quality housing, the ability to have better health care, the option of choosing more leisure, the ability to invest in environmentally - friendly production techniques, the freedom to choose between an array of options denied to those where economic growth is low or non - existent. and secondly i want to talk about economic growth because there is still a great deal of public misunderstanding about the role of the reserve bank and monetary policy in encouraging or discouraging economic growth. there is still quite a widespread view that the reserve bank ’ s exclusive focus on delivering predictably low inflation involves a cost in economic growth, and that if only the bank were not so obsessive about its inflation objective the new zealand economy could grow much more quickly. people look back to the 5, 6 and 7 percent growth rates achieved just a few years ago, and wonder why we can ’ t return to those growth rates. they look at our asian neighbours expanding with breathtaking speed, and wonder why we can ’ t emulate them. they reflect on the painful restructuring that the new zealand economy underwent from 1984, and ask if it was all worthwhile. some people suspect that perhaps the reserve bank has denied us the benefits which should have been available. so today i want to discuss the issue of economic growth in the broadest terms. my aim is to provide a framework for thinking about what

. the china value is the change in nfl between december 2010 and december 2016, due to comparable imf data being unavailable prior to 2010. new zealand ’ s nfl relative to gdp remains large compared to that of many advanced economies, albeit similar to that of australia and the united states ( figure 4 ). figure 4 : nfl as at the december 2016 quarter ( share of annual gdp ) source : imf, statistics new zealand, rbnz estimates. note : a negative nfl position ( shown in blue ) is equivalent to a positive niip. while the improvement in our nfl is moderate by international standards, it is unusual when compared to new zealand ’ s experience in past expansions. changes of a similar magnitude have been seen in the past, but have been partially reversed by this point in the economic ref # 7076865 v2. 1 cycle. in the current expansion the current account deficit has remained fairly stable relative to gdp, whereas it had usually begun to widen at this point in previous expansions ( figure 5 ). indeed, reflecting these episodes, the bank and others had been forecasting the current account deficit to widen throughout most of the post - gfc period ( figure 6 ). figure 5 : current account over gdp expansions ( annual total, share of gdp ) source : statistics new zealand, rbnz estimates. note : expansions based on estimates from hall and mcdermott ( 2016 ), with data shown as quarters from the trough. comparisons with earlier expansions are complicated by significant structural changes – for example, restrictions on new zealand ’ s then capital account ( now known as the financial account ) were removed at the end of 1984, and the exchange rate was floated in early 1985. figure 6 : rbnz current account forecasts ( annual total, share of gdp ) source : statistics new zealand, rbnz estimates. note : this figure includes any statistical revisions to the current account. ref # 7076865 v2. 1 what accounts for the improvement in our nfl position? understanding what has driven the improvement can help us assess how sustainable the improvement might be. i will explore this through two lenses : a balance of payments perspective and a saving and investment perspective. ( i ) balance of payments perspective a balance of payments perspective reveals that much of the improvement in our nfl can be accounted for by lower interest payments on our debt, the recent strength in tourism and education exports, and favourable net revaluations. figure 7 decomposes the current account