The Reserve Bank says New Zealand's recovery from recession could be slow for several more years, as the economy shifts from spending to saving, and fiscal stimulus is gradually withdrawn.
Governor Alan Bollard told a business audience in Auckland on Friday that the West's trade imbalance with Asia, the sovereign debt crisis facing many nations and escalating currency wars, continue to weigh on the global recovery.
Dr Bollard said New Zealand is one of several developed economies trying to rebalance its economy and reduce debt in the wake of the global financial crisis.
While progress was being made, he said the country still faces many international headwinds. Demand from Western countries, though improving, is still weak.
Dr Bollard cited the sagging US housing market, which he sayshas hurt wood exports; Japanese not eating as much New Zealand food products; and Britain's public debt crisis, which has reduced the number of tourists coming here.
A jump in Government spending and low interest rates have cushioned the economy, but the gradual withdrawal of both will dent New Zealand's economic growth for a number of years.
However, Dr Bollard said the buoyant Australian economy and rapidly growing demand in Asia, Russia, South America, and South Africa offer New Zealand's best hope for recovery.
That is because increasing demand for food from a rising middle class in developing countries will help New Zealand trade its way out of its current situation.
But Dr Bollard warned it will be a prolonged process.