The 2008-09 recession was moderated by unprecedented policy stimulus and by relatively strong growth in Australia and Asia, New Zealand’s largest trading partners, which also boosted the terms of trade. The subsequent recovery has been unexpectedly weak and patchy, however. A large debt overhang and increased risk aversion following the global crisis have led to a wish to deleverage by households, firms, banks and (soon) by government. This seems a necessary and desirable part of adjusting toward more sustainable long-run growth. The debt-fuelled property boom of the past decade drove down already structurally low household saving rates. Expansionary fiscal measures implemented prior to the recession, together with cyclical revenue shortfalls and major one-off earthquake costs, have now reduced government saving rates as well. With most of the growth in household, business and now government debt funded from abroad, for the private sector mainly through the banking system, net foreign liabilities have accumulated to levels that make the economy particularly vulnerable to sharp changes in investor sentiment. Persistently higher interest rates relative to other countries are symptomatic of low levels of national saving and have attracted significant capital inflows, placing upward pressure on the exchange rate and thereby shrinking the trade-exposed sector. Relatively high interest rates have also driven up the cost of capital, restraining domestic investment and hence longer-term growth prospects. The official objective of closing the productivity gap with Australia will require a re-balancing of the economy away from consumption towards more productive sources of growth. Fiscal consolidation, in particular through paring back public spending, will play an important role in reducing pressure on the exchange rate and improving the external position. This would allow price stability to be maintained at lower real and nominal interest rates. Public transfer cuts and capital divestments could, in a context of broader regulatory reforms to reduce policy distortions, serve to improve private incentives to work, save and invest, boosting potential growth.