In small advanced open economies, expansions usually come to an end for one or more of the following reasons: growth in the global economy slows; the nation’s terms of trade decline significantly; a major policy correction is needed to address a deteriorating fiscal or current account deficit; or interest rates rise significantly in order to moderate rising inflation pressures associated with growing supply and demand imbalances.
The economic slowdown is intensified if the adjustment is accompanied by a sizeable decline in house prices. Are any of these factors likely to end New Zealand’s current expansion? A further slowdown in global growth remains possible given the vulnerabilities in several major advanced economies due to low productivity growth and high levels of public and private sector debt.