IMF Executive Board Concludes 2015 Article IV Consultation with New Zealand

Press Release No. 16/47
February 8, 2016

On February 5, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with New Zealand.

The economy’s strong growth after the global financial crisis has been supported by rising terms of trade and reconstruction activity after the 2010–11 Canterbury earthquakes, as well as high net immigration. Growth peaked at 3.5 percent year-on-year (y/y) in Q4 2014, bringing output slightly above potential. However, the tailwinds have recently waned. In 2014, dairy prices began to fall from historic highs, leading to a sharp drop in income growth after the positive effect of declining oil prices had worn off, and investment activity related to the Canterbury rebuild has reached a plateau. As a result, output growth is estimated to have slowed to 2.3 percent in 2015, despite resilient consumption. Meanwhile, unemployment has been edging up reaching 6 percent in Q3 2015. Due largely to the decline in oil prices, inflation has dropped to 0.3 percent (y/y) in Q3 2015. House price inflation in Auckland has remained high, driven fundamentally by supply shortages.

The exchange rate depreciation has cushioned some of the impact of the decline in dairy prices. The bilateral exchange rate against the U.S. dollar has depreciated as dairy prices fell and the Reserve Bank of New Zealand (RBNZ) eased monetary policy. The depreciation has mitigated the impact of the international dairy price decline on farmers’ incomes, and supported exports of travel and education services.

With growth below potential, measures of core inflation around the lower half of the target band, and a still strong exchange rate, monetary policy has been eased since June and the Reserve Bank stands ready to reduce rates further if warranted.

To manage risks arising from house price inflation in Auckland, macroprudential measures were introduced in 2013, leading to a temporary slowdown in price hike. A package of additional macroprudential regulations and tax measures was announced in May 2015, but having become fully effective only in November. The banking sector has increased capital and liquidity buffers, but reliance on offshore funding and a large share of mortgage lending remain sources of vulnerability.

Fiscal policy is also supportive of the economy in the short term, while consolidation is projected to resume in the medium-term. Automatic stabilizers have been allowed to work and public investment is being increased. Net debt is projected to decline further to around 5 percent of GDP in the medium term.2

With chronically low national saving, New Zealand’s economy is dependent on borrowing from abroad. Its persistently negative savings-investment balance has led to the accumulation of a large net negative international investment position (IIP) which reached65 percent of GDP in 2014.

The short-term outlook is challenging with both external and domestic risks, the latter arising from rapid house price inflation in Auckland. However, New Zealand’s flexible economy is resilient, and medium-term prospects remain positive. New Zealand’s main exports—agricultural consumer products and tourism—should benefit from the ongoing shift to a more consumption-oriented growth model in China. Consumer demand in other Asian countries is also expected to grow. Overall, output growth is projected to recover to its estimated potential rate of 2.5 percent. With measures of core inflation around the lower end of the target range and expectations consistent with the band’s midpoint, inflation is forecast to rise to within the RBNZ’s target range of 1–3 percent in 2016.

Executive Board Assessment3

Executive Directors welcomed that New Zealand’s economy continues to perform well despite the slowdown imposed by the fall in dairy prices, plateaued investment associated with the Canterbury rebuild, and slower growth in trading partners. Directors agreed that New Zealand’s sound and flexible policy frameworks, including the important buffer provided by the flexible exchange rate, position the country well to weather the recent slowdown. Medium-term prospects remain positive, and Directors were encouraged by the authorities’ alertness to the downside risks and challenges arising from real estate market pressures, a persistently low savings rate, and relatively low productivity.

Directors considered the current accommodative monetary stance to be appropriate and agreed that, if needed, the authorities should stand ready for further easing given low inflationary pressures and below potential output. With regard to fiscal policy, they agreed that the planned easing this year and next, including through an acceleration of public investment in infrastructure, combined with a resumption of gradual fiscal consolidation thereafter, is appropriate. These measures should support the economy in the short term and bolster the public sector balance sheet in the longer term.

Directors noted that the banking system is resilient and well-supervised. They commended the proactive prudential and tax measures being taken to address the risks stemming from the housing market. Noting that the underlying cause of the housing market boom in Auckland is a supply/demand mismatch, they encouraged the authorities to be ready to use additional prudential measures and consider steps to reduce the tax advantage of housing over other forms of investments, while continuing to address supply-side bottlenecks.

Directors agreed that raising national and in particular private saving is critical to reducing external vulnerabilities from the still heavy reliance on offshore funding. They noted that higher saving may also reduce capital costs by lowering the risk premium and thereby support productive investment and long-term growth. They encouraged the authorities to consider comprehensive policy measures to boost long-term financial savings, including through reform of retirement income policies, as this could also help deepen New Zealand’s capital markets and broaden options for retirement planning.

Directors observed that, notwithstanding high living standards, New Zealand incomes lag those of other advanced economies, due to relatively low capital intensity and productivity. Acknowledging that the economy’s small size and distance from markets likely limit gains from trade, they encouraged the authorities to build on the country’s business-friendly environment to take steps to boost competition in key service sectors, leverage ICT more intensively, and address key infrastructure bottlenecks. They welcomed the focus of the government’s Business Growth Agenda on these issues.


New Zealand: Main Economic Indicators, 2010-2020
(Annual percent change, unless otherwise indicated)
 
  2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Projections                                      
 

NATIONAL ACCOUNTS

Real GDP (production)

1.5 2.0 2.6 2.4 3.7 2.3 2.0 2.6 2.5 2.3 2.3

Real GDP (expenditure)

2.0 1.8 2.8 1.7 3.0 2.7 1.8 2.7 2.5 2.3 2.3

Domestic demand

3.8 3.2 3.1 3.2 4.4 2.9 2.4 2.4 2.5 2.6 2.8

Private consumption

3.1 2.6 2.8 3.0 2.7 2.4 2.6 2.8 2.9 3.0 3.0

Public consumption

0.8 2.6 -0.4 1.6 2.7 2.4 1.3 1.1 1.2 1.2 1.2

Investment

8.4 5.3 7.4 5.4 10.8 3.7 2.7 2.4 2.7 2.7 3.4

Public

2.6 0.5 -5.2 0.4 7.2 8.1 3.3 1.1 1.4 0.5 0.3

Private

-0.3 9.1 12.3 6.8 12.3 3.1 2.1 2.9 3.2 3.5 3.9

Private business

-0.8 13.2 11.8 4.2 11.2 2.0 1.5 2.6 3.0 3.5 4.1

Dwelling

0.6 0.8 13.3 12.9 14.6 5.2 3.4 3.5 3.5 3.5 3.5

Inventories (contribution to growth, percent)

1.5 -0.2 0.1 0.1 0.0 -0.1 0.0 0.0 0.0 0.0 0.1

Net exports (contribution to growth, percent)

-1.9 -1.3 -0.3 -1.6 -1.6 -0.4 -0.4 0.2 -0.1 -0.4 -0.6

Real gross domestic income

3.9 2.7 0.9 4.4 5.0 0.8 0.2 3.1 3.3 3.0 2.8

Investment (percent of GDP)

20.2 20.3 21.2 21.4 22.5 22.8 22.9 22.5 22.1 21.7 21.5

Public

6.2 6.0 5.5 5.3 5.4 5.7 5.8 5.6 5.4 5.2 5.0

Private

13.4 14.0 15.3 15.6 16.7 16.8 16.8 16.6 16.4 16.2 16.1

Savings (gross, percent of GDP)

24.6 19.9 17.5 19.3 19.4 18.2 16.3 16.3 16.6 16.5 16.2

Public

-0.1 -0.3 0.6 0.2 -0.1 0.1 -0.6 -0.3 0.2 0.8 0.8

Private

24.7 20.2 16.9 19.1 19.5 18.0 16.9 16.7 16.4 15.7 15.4

Potential output

1.1 1.5 2.0 2.4 3.0 2.9 2.4 2.4 2.3 2.3 2.3

Output gap (percent of potential)

-1.3 -0.9 -0.3 -0.3 0.4 -0.1 -0.5 -0.4 -0.2 -0.1 0.0

LABOR MARKET

Employment

0.5 1.5 0.2 1.6 3.5 2.1 1.4 1.3 1.2 1.0 1.0

Unemployment (percent of labor force)

6.6 6.5 6.9 6.2 5.8 5.9 5.9 5.8 5.8 5.7 5.5

Wages (nominal percent change)

1.2 2.9 3.0 2.4 2.5 2.1 2.0 2.3 2.3 2.3 2.4

PRICES

Terms of trade index (goods, % change)

8.8 3.9 -6.3 8.5 5.7 -7.0 -5.4 1.1 2.3 2.0 1.4

Consumer prices (avg, % change)

2.3 4.0 1.1 1.1 1.2 0.3 1.7 1.9 2.0 2.0 2.0

GDP deflator (avg, % change)

3.5 2.8 0.0 2.2 1.4 0.0 0.2 1.8 1.8 2.2 2.2

MACRO-FINANCIAL

Reserve Bank of New Zealand Policy Rate (percent,avg)

2.8 2.5 2.5 2.5 3.3 2.9 2.5 2.9 3.8 4.0 4.4

Credit to the private sector (percent change)

0.5 1.7 3.7 5.1 4.5 6.7 6.0 4.0 4.2 4.3 4.5

House prices (percent change, avg)

1.9 1.2 4.7 9.1 6.5 11.6 7.3 4.1 4.0 3.9 3.9

Interest payments (percent of disposable income)

10.3 9.5 8.9 8.7 9.2 9.1 9.5 9.8 10.1 10.4 10.5

Household savings (percent of disposable income)

4.1 3.7 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8

Household debt (percent of disposable income)

155 151 151 155 154 158 157 156 155 154 153

CENTRAL GOVERNMENT (percent of GDP) 1/

Revenue

34.0 33.9 33.9 33.9 34.1 35.1 35.6 35.4 35.3 35.4 35.5

Expenditure

40.5 40.1 36.4 35.5 34.3 35.0 36.2 35.7 35.1 34.6 34.8

Net lending/borrowing

-6.5 -6.1 -2.5 -1.5 -0.1 0.1 -0.6 -0.3 0.2 0.8 0.8

Operating balance

-4.9 -4.6 -1.5 -0.5 0.7 1.3 1.3 1.3 1.6 2.0 1.9

Cyclically adjusted balance

-5.6 -5.2 -1.6 -0.8 0.5 0.6 -0.1 0.2 0.7 1.2 1.2

Gross debt

26.9 31.5 32.0 30.8 30.8 30.8 31.3 30.6 28.3 27.0 26.1

Net debt

2.3 6.1 7.6 7.7 7.6 7.7 8.1 8.1 7.5 6.4 5.3

Net worth

41.8 32.0 28.3 30.5 33.4 35.5 36.1 35.9 35.6 35.8 36.1

BALANCE OF PAYMENTS

Current account (percent of GDP)

-2.3 -2.8 -3.9 -3.2 -3.1 -4.8 -6.7 -6.2 -5.5 -5.3 -5.4

Export volume

3.3 2.6 1.9 0.8 3.0 5.5 2.2 3.0 3.0 2.4 2.4

Import volume

10.8 7.0 2.8 6.2 7.9 6.0 3.3 2.1 2.9 3.4 3.8

Net international investment position (percent of GDP)

-71.8 -69.1 -69.5 -64.5 -64.6 -65.4 -70.7 -73.9 -76.3 -78.2 -80.2

Gross official reserves (bn US$)

16.4 17.2 17.7 16.5 15.8 17.6

MEMORANDUM ITEMS

Nominal GDP (bn NZ$)

202 211 217 227 238 244 249 260 272 284 297

Percent change

5.0 4.8 2.5 4.6 5.1 2.3 2.1 4.5 4.4 4.6 4.6

Nominal GDP per capita (US$)

33,227 37,976 39,659 41,541 43,458 36,780 35,081 36,209 37,160 38,405 39,705

Real gross national disposable income per capita (NZ$)

43,374 44,210 44,542 46,016 47,349 47,553 47,301 48,282 49,443 50,489 51,453

Percent change

2.6 1.9 0.8 3.3 2.9 0.4 -0.5 2.1 2.4 2.1 1.9

Population (million)

4.3 4.4 4.4 4.4 4.5 4.6 4.6 4.7 4.7 4.7 4.8

US$/NZ$ (average level)

0.6 0.7 0.8 0.8 0.8

Nominal effective exchange rate

100 103 108 112 117

Real effective exchange rate

100 104 108 111 115
 

Sources: Authorities' data and IMF staff estimates and projections.

1/ Calendar year.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 GFS Measure.

3 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



IMF COMMUNICATIONS DEPARTMENT

Media Relations
E-mail: media@imf.org
Phone: 202-623-7100