IMF Executive Board Concludes 2023 Article IV Consultation with New Zealand
IMF News, August 28, 2023
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- Published: August 28, 2023
Economic context and recent developments
- New Zealand’s economy is in the midst of a necessary, policy-induced slowdown following the strong post-pandemic recovery.
- Faster recovery than most other advanced economies supported activity; generous fiscal and monetary support resulted in strong investment and consumption.
- Overheating occurred against capacity constraints exacerbated by restrictions on labor movement due to border closures, and disruptions in global supply chains.
- External balance has deteriorated significantly.
- The Reserve Bank of New Zealand (RBNZ) tightened monetary policy since October 2021, increasing the policy rate by 525 bps to 5.50 percent.
- Following an expansionary fiscal policy in FY2021/22, spending moderated slightly in FY2022/23 due to winding down of COVID-related expenditures.
- The economy is slowing, but significant and persistent labor market constraints have put upward pressure on wages, and the large positive output gap have kept inflation high.
- House prices have corrected significantly, but affordability remains an issue.
- Financial stability risks appear contained.
Outlook and risks
- Growth outlook:
- Growth is expected to slow to around 1 percent y/y in 2023 and 2024.
- Possibility of a technical recession despite some short-term boost from higher spending to address the North Island weather events and funding to meet central government cost pressures.
- Inflation:
- Inflation is likely to decline gradually to the 1–3 percent target range only in 2025 given the pick-up in non-tradable inflation.
- Labor market and migration:
- With the border reopening, net migration has picked up sharply and should further alleviate labor market tightness, though the effect on net demand is unclear.
- Key risks:
- External environment: global growth, deepening geo-economic fragmentation, and financial stability shocks.
- Domestic policy: persistently high inflation and wage growth could compel the RBNZ to tighten monetary policy further or keep rates high for longer, especially if fiscal policy does not consolidate as planned.
- Consequences of stronger or prolonged tightening include effects on growth, household consumption, house prices, and potential financial stability implications under severe stress.
Executive Board Assessment and policy advice
- Monetary policy:
- Directors welcomed the RBNZ’s commitment to reduce inflation to target levels in a data-dependent manner.
- They saw little scope to lower policy rates currently given the tight labor market and stubborn core inflation.
- A reignition of inflationary pressures would call for additional monetary policy tightening.
- Compiling a monthly inflation index would enhance the effectiveness of monetary policy.
- Fiscal policy:
- Reconstruction spending should be prioritized in the aftermath of the North Island weather events.
- Medium-term fiscal consolidation is needed to support rebalancing efforts and create space for addressing longer-term challenges related to population aging and climate change.
- Support for increasing the efficiency of discretionary spending and welcoming the reinstatement of fiscal rules and the authorities’ commitment to fiscal sustainability.
- Financial stability and macroprudential policy:
- Financial stability indicators show few signs of stress, but household and financial balance sheets should continue to be monitored closely.
- Welcome the addition of debt-to-income restrictions to the macroprudential toolkit.
- RBNZ should stand ready to provide liquidity if funding markets come under stress, including from spillovers from global financial markets.
- Housing and structural policies:
- Directors pointed to housing shortages, noting a strong need to improve affordability and expand housing supply including for social housing.
- Welcomed efforts to further enhance the AML/CFT framework.
- Commended authorities’ efforts to foster durable, inclusive, and green growth; noted challenges from large infrastructure deficits, climate change, low productivity, aging, and inequality.
- Welcomed the 2022 Digital Strategy for New Zealand which aims to grow the digital workforce, address labor shortages and skills mismatches, and increase the digital inclusion of under-represented groups.
- Encouraged by the decoupling of greenhouse gas emissions and economic growth and noted strong policy initiatives under the Emissions Reduction and National Adaptation Plans, including the review of the Emissions Trading Scheme.
Table 1: Main Economic Indicators, 2019-2028 (selected figures, annual percent change unless otherwise indicated)
- NATIONAL ACCOUNTS
- Real GDP (production): 3.1; -1.5; 6.1; 2.7; 1.1; 1.0; 2.1; 2.2; 2.4
- Domestic demand: -1.8; 10.3; 3.5; -0.3; -1.1; 1.5; 1.9; 2.3
- Private consumption: 3.2; -2.2; 7.9; 2.9; -0.5
- Public consumption: 4.7; 7.2; 8.2; 4.5; 1.6; 1.2; 0.3; 0.5; 0.2
- Investment: -7.8; 18.4; 3.7; -1.3; -0.8; 0.8; 3.6; 3.9
- Public investment: 8.9; -0.4; 0.7; 4.1; 4.4; 4.6
- Private investment: 5.1; -8.1; 13.8; 5.2; -2.1; 0.4; 1.7; 3.3
- Private business: 5.0; -10.3; 16.5; -2.5; 3.4
- Dwelling investment: 5.3; -3.1; 8.4; -1.2; 2.0
- Inventories (contribution to growth, percent): 1.3; 0.0
- Net exports (contribution to growth, percent): -4.9; -1.6
- Real gross domestic income: 1.4; -0.1
- Investment (percent of GDP): 24.0; 22.2; 25.2; 26.6; 26.4; 26.1; 25.9; 25.8; 26.0
- PRICES AND TERMS OF TRADE
- Terms of trade index (goods and services, % change): -2.9; -4.7; -0.7
- Consumer prices (avg, % change): 4.9
- GDP deflator (avg, % change): 5.5; 5.8; 3.0
- LABOR MARKET
- Unemployment (percent of labor force, ann. average): 3.8
- Wages (nominal percent change): 6.7; 4.2; 2.6
- MACRO-FINANCIAL
- Official cash rate (policy rate, percent, avg): 4.8; 4.3
- Credit to the private sector (percent change): 5.6; 4.0
- Interest payments (percent of disposable income): 8.0; 9.4; 8.3; 7.0
- Household debt (percent of disposable income): 169; 170; 173; 156; 147; 143; 141; 140; 126
- GENERAL GOVERNMENT (percent of GDP) 1/
- Revenue: 37.8; 36.2; 37.7; 39.3; 39.0; 38.6; 39.6; 40.1; 40.2; 40.4
- Expenditure: 36.6; 42.5; 43.9; 41.6; 42.9; 42.4; 41.8; 41.2
- Net lending/borrowing: -6.2; -4.6; -2.6; -4.2; -2.8; -0.9
- Operating balance: -0.2; -1.9; -1.4
- Cyclically adjusted primary balance 2/: -3.9; -4.1
- Gross debt: 26.2; 38.5; 46.0; 48.6; 44.6; 48.1; 51.3; 53.0; 51.0; 48.7
- Net debt: 9.7; 10.6; 16.7; 21.5; 27.8; 32.0; 33.9; 32.6; 30.3
- Net worth: 93.2; 85.5; 94.6; 97.7; 91.8; 89.2; 85.1; 82.1; 81.9; 82.8
- BALANCE OF PAYMENTS
- Current account (percent of GDP): -1.0; -6.0; -9.0; -6.6; -5.8; -5.2
- Export volume: -13.5; -2.4; 7.4; 9.0; 7.7
- Import volume: -15.8; 14.8; 5.4
- Net international investment position (percent of GDP): -53.7; -55.8; -46.4; -51.2; -53.1; -58.8; -62.0; -63.9; -65.3; -66.2
- Gross official reserves (bn US$): 17.0; 13.0; 16.4; 13.7; …
- MEMORANDUM ITEMS
- Nominal GDP (bn NZ$): 320; 323; 352; 380; 406; 413; 432; 457; 482; 504
- Percent change (nominal GDP): 9.1; 6.6
- Nominal GDP per capita (US$): 42,275; 41,292; 48,775; 47,198; 48,827; 48,409; 49,631; 51,545; 53,605; 55,789
- Real gross national disposable income per capita (NZ$): 53,631; 52,621; 54,703; 54,996; 55,133; 54,758; 56,291; 57,243; 58,574; 2.8
- Population (million): 2.8
- US$/NZ$ (average level): 0.659; 0.650; 0.708; 0.636
- Nominal effective exchange rate: 105.9; 104.5; 109.9; 106.6
- Real effective exchange rate: 101.7; 100.9; 107.6; 105.4
Source: IMF Executive Board Concluding Statement on the 2023 Article IV Consultation with New Zealand (August 28, 2023).