New Zealand: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, March 20, 2024
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- Published: March 20, 2024
Macro outlook and recent performance
- Real GDP growth is projected to slow to 1.1 percent in 2024 before recovering in 2025.
- Growth drivers and recent developments:
- Economic activity slowed following monetary policy tightening and a decline in investment.
- Reserve Bank of New Zealand (RBNZ) cumulative rate hikes of 525 bps between October 2021 and May 2023.
- First three quarters of 2023: contraction in private investment and government consumption; slow growth in household consumption.
- Record net migration in 2023 helped address supply-side bottlenecks and labor shortages.
- High frequency indicators point to slow growth in the December quarter.
- External sector:
- Current account deficit narrowed in 2023 but remains above its long-run average.
- Goods trade deficit narrowed marginally; tourist and student arrivals recovering toward pre-pandemic levels.
- Primary income deficit increased due to higher interest rates on New Zealand’s net external liabilities.
- IMF staff assess the external position in 2023 remained weaker than implied by medium-term fundamentals and desirable policies.
Inflation and monetary policy
- Inflation trajectory and outlook:
- Inflation declined from its 7.3 percent y/y peak in 2022Q2 to 4.7 percent y/y in 2023Q4.
- Headline inflation expected to fall below 3 percent y/y in 2024Q3.
- Trimmed-mean and non-tradable inflation are more persistent; inflation expectations remain anchored.
- Drivers of persistent inflation:
- Delayed passthrough from pandemic-era shocks, weather-related domestic food shortages, tight labor markets, persistent wage pressures, and migration effects on rental and housing costs.
- Global disinflation has helped reduce headline inflation, but domestic pressures persist.
- Policy stance:
- Monetary policy is appropriately tight and should remain restrictive to ensure a timely return of inflation to target.
- IMF staff expect a gradual easing of monetary policy starting toward the end of 2024, supporting growth recovery to over 2 percent y/y in 2025.
- Unemployment rate expected to increase and level around 5 percent in 2024 and 2025 as the output gap turns negative.
- RBNZ’s increase of financial resources in 2023 (through additional capital and an indemnity) and increased FX reserves support capacity to safeguard stability.
- Recent change to the RBNZ's remit reinforces the price stability objective and is not expected to affect monetary policy.
Fiscal outlook and recommendations
- Current fiscal stance:
- Current fiscal policy is more expansionary than in most other advanced economies.
- Government is running a structural fiscal deficit with spending-to-GDP ratio higher in FY23/24 after Budget 2023’s sizable operating and capital allowances and one-off outlays related to the North Island weather events.
- Weaker-than-expected revenue as economic activity slowed resulted in a larger-than-expected positive fiscal impulse.
- Net general government debt at around 20 percent of GDP at end-2023.
- Fiscal policy recommendations:
- Budget 2024 should deliver a tight fiscal stance in FY24/25 to support disinflation.
- Calibrate funding, timing, and parameters of planned personal income tax relief to be fiscally neutral to avoid upside pressure to inflation.
- Signal strong commitment to consolidation by addressing structural fiscal challenges; restoring an operating surplus in the 4-year forecast period should remain the objective, underpinned by efficacious caps on operating allowances.
- Conduct comprehensive cost-benefit analysis of government programs and address long-term aging-related fiscal pressures.
- Protect outlays on high-value infrastructure and support to the most vulnerable while focusing consolidation on areas that increased the most since the pandemic (wage bill, transfers, social benefits).
Structural reforms for supply, productivity, and housing
- Housing and urban policy:
- Housing prices: 13 percent decline from 2022Q1 to 2023Q2; stabilized but remained 25 percent above their 2020Q1 level in 2023Q3.
- Rents: up 7 percent y/y in September 2023 and 13 percent higher than in January 2020.
- Household debt: 165 percent of disposable income in 2023Q2.
- Recommendations: urgently boost housing supply through reforms to land use restrictions and zoning; invest in transport and water infrastructure; address local councils’ funding and capacity constraints.
- Productivity and labor market:
- Labor productivity growth has been slow for decades, contributing to rapid increase in unit labor costs and undermining competitiveness.
- Recommended policies: public investment in R&D, new infrastructure, and maintenance of existing public capital stock; more predictable infrastructure pipeline; further immigration and improved education outcomes and skills matching to address skills shortages and boost productivity.
- Education concerns: 2022 PISA results show continuing declines and differences across socio-economic backgrounds; New Zealand lags other advanced economies in post-graduate degrees partly due to emigration of skilled New Zealanders.
- Labor market inclusiveness: long-term unemployment and Māori unemployment rates remain high; active labor market policies and expanded training opportunities recommended.
- Minimum wage: relative to the median it is among the highest in advanced economies; increases should be commensurate with productivity growth.
Financial stability and macroprudential measures
- Financial system resilience:
- Non-performing loans have ticked up but remain low; banking system remains well-capitalized, liquid, and profitable.
- Continued monitoring needed due to risk of protracted downturn raising unemployment and affecting household incomes.
- Macroprudential recommendations:
- RBNZ proposal to activate debt-to-income (DTI) restrictions and ease loan-to-value settings somewhat is appropriate.
- Introduction of DTI would protect against high-risk lending; location-based DTIs could be considered later to account for regional differences.
- Deposit Takers Act is welcome to harmonize regulation for bank and non-bank deposit takers and introduce deposit insurance; a proportionate approach to rule-making is needed to support competition and address concerns of smaller deposit takers.
Climate, emissions, and adaptation
- Climate risks and adaptation:
- New Zealand is susceptible to climate shocks, rising temperatures, and natural disasters.
- Government committed to new spending on flood protection works and has launched an inquiry into adaptation funding and managed retreat; RBNZ has conducted financial sector climate stress tests.
- Additional efforts needed: invest in adaptation infrastructure, limit residential zoning in high-risk areas, address data gaps, and rebuild fiscal buffers.
- Emissions policy:
- Emissions Trading Scheme (ETS) has helped limit net emissions via reductions and removals, particularly from afforestation.
- Significant reforms needed to meet domestic and international targets, including New Zealand's first Nationally Determined Contribution (NDC) and the 2050 Net Zero:
- Reduce the number of available units in the scheme.
- Price agricultural emissions.
- Strengthen incentives for gross emissions reductions within the ETS.
- Given the ambition of New Zealand’s first NDC, use of international mitigation is likely to be required; environmental integrity risks and relative costs should be considered in policy decisions.
Risks and scenarios
- Main downside and upside risks:
- Downside: policy miscalibration (premature monetary easing could de-anchor inflation expectations), larger-than-anticipated impact of monetary tightening causing protracted downturn and inflation undershoot, high interest rates and low growth creating stress in financial markets (especially mortgage lending), natural disasters and climate shocks, geo-economic fragmentation.
- Upside: stronger migration boosting labor supply and lowering wage pressures, faster-than-expected decline in inflation allowing earlier monetary easing.
- IMF staff scenario expectations:
- Headline inflation expected below 3 percent y/y in 2024Q3.
- Gradual monetary easing toward end-2024 could support recovery to over 2 percent y/y in 2025.
- Unemployment to level around 5 percent in 2024 and 2025.
IMF staff concluding statement, March 19, 2024.