Alan Bollard

Wellington, Dec 10 NZPA - The nation's gross domestic product (GDP) is recovering but it may be late next year "before we see the ground made up that we lost during the global financial crisis," says Reserve Bank Governor Alan Bollard.

But some of the improvements forecast for the nation's current account deficit were partly driven by one-off factors such as bank payments and tax, Dr Bollard told MPs at Parliament's finance and expenditure select committee today.

And stronger external prices were mainly propped up by improved prices and exports from the dairy sector.

"We're not seeing very much business investment," he said.

The labour market was expected to bottom out next year, with an unemployment peak of 6.8 percent in March 2010 -- less than in previous recessions. Current projections were for a loss of about 60,000 jobs, and so far the toll was about 55,000, which meant most of the job losses due to the recession had already occurred.

Dr Bollard was speaking to the MPs after releasing re-vamped forecasts for the economy, which showed GDP growth now only slightly below the long term trend, with 4.2 percent growth for the year to March 2011.

House prices had surprisingly pushed up -- but more houses would be coming back on the market and there would be more construction.

The bank was not concerned about a credit-driven housing "bubble" because there had been limited growth of credit for house buyers.

"Household prices are going in one direction and household credit (new loans) is going in another direction, and that won't continue -- it's got to come together in some way," Dr Bollard said. If there was not much new lending, then any housing recovery would be "credit constrained".

"We expect to see house price increases slow down," he said.

"We are seeing households rebalancing and reducing debt ... but we're still learning about how households have made a change in behaviour as a result of this recession."

Reserve Bank officials were concerned that there was still a perceived incentive in the tax system for people to invest in housing, rather than savings that could be used by productive businesses, but the bank did not get involved in the taxation system.

"We'd like to see tax regimes that are neutral," said Dr Bollard. There was some indication of households spending less and saving more, but it was not possible to tell how much of this was a longterm change in behaviour.

Simon Tyler, head of financial markets at the Reserve Bank, told MPs that New Zealand was developing a "positive yield curve" with higher yields on long term debt than short term -- because overseas lenders had raised the cost of longer-term money during the global crisis, and it was hard to see cheaper rates for such money returning soon. The cost of term money rose from a quarter of 1 percent to over 2 percent, and was now about 1.75 percent.

One year ago, only 10 percent of mortgages would have been on floating rates, but now the proportion was about 20 percent, and of the remaining 80 percent fixed-rate loans, many were on relatively short terms. This was important because it meant changes in the official cash rate (OCR) set by the bank would have more immediate effects on rates at which banks offered loans.