From 1998 to 2007 there were a number of significant shocks that determined the shape of the business cycle (figure 2). First, there was a strong and unexpected increase in population growth from net immigration in 2002/03. Second, there was a significant boost to the economy from a rising terms of trade from 2000, which accelerated late in the period.
In competitive financial markets, the greater the leverage, the higher the rate of return, before adjustment for risk. If private financial institutions have to absorb all financial risk, then the degree to which they can leverage will be limited, the financial sector smaller, and its contribution to the economy more limited.