Mission Concluding Statement 

New Zealand - Staff Concluding Statement of the 2025 Article IV Mission

March 11, 2025

• Real GDP growth is projected to rebound to 1.4 percent y/y in 2025 and 2.7 percent y/y in 2026. Inflation is expected to remain within the target band.
• Fiscal and monetary policies remain appropriate: fiscal consolidation is expected over the medium-term, and monetary policy easing to a neutral level is warranted.
• The macroeconomic environment provides a window of opportunity for New Zealand to consider broad-based reforms needed to address medium and long-term challenges, including to secure fiscal sustainability, boost productivity, address persistent infrastructure and housing supply gaps, and initiate early dialogue on population aging.

Washington, DC: 

The Economic Cycle is Bottoming Out

The New Zealand economy faltered in 2024 amid tight financial conditions, as inflation successfully returned to target and the current account deficit narrowed. Real GDP is estimated to have contracted by 0.5 percent y/y in 2024, as investment fell heavily. Personal income tax cuts in 2024 have somewhat mitigated a decline in consumer demand, although household spending has been curtailed by a second consecutive year of declining real disposable income per capita. Lower capacity utilization and rising unemployment indicates some slack, consistent with the output gap turning negative in 2024. A recovery in external demand, improved terms of trade, and a slowdown in imports have helped narrow the current account deficit, which however remains high with a large structural component. New Zealand’s external position in 2024 is assessed as weaker than implied by medium-term fundamentals and desirable policies. Weaker global prices and tight monetary policy brought inflation to target after 13 consecutive quarters, leading the Reserve Bank of New Zealand (RBNZ) to appropriately ease the Official Cash Rate (OCR) four times since August 2024 by 175 bps to 3¾ percent. High frequency data suggests a nascent economic recovery, with improved business and consumer confidence observed in 2024Q4.

The financial system remains resilient, and the housing market has stabilized. Still-high debt service costs and a slowing economy have led to a rise in non-performing loans; nonetheless, the rise has been muted relative to past recessions, and banks are well capitalized and have built adequate buffers to absorb losses. Credit growth has been soft, reflecting weak demand. Housing sales volumes are picking up gradually, and prices have stabilized roughly 25 percent above pre-pandemic levels; housing affordability is improving as nominal incomes rise.

The Recovery is Underway

Growth is expected to pick up as monetary policy eases and price pressures remain contained. Growth is projected to rebound to 1.4 percent y/y in 2025 and accelerate to 2.7 percent in 2026. A normalization of monetary policy should bolster consumption and investment, with aggregate demand also supported by net exports. Over the medium-term, economic growth will be driven by migration, while productivity growth is expected to remain modest if there are no significant structural reforms. Higher import prices and the weaker New Zealand dollar are likely to cause a temporary uptick in inflation in 2025, but the negative output gap will help keep headline inflation within the target band. The current account is expected to improve further in 2025 supported by favorable agriculture commodity prices, gradually aligning with the historical average deficit of 3½ to 4 percent of GDP.

IMF staff assess risks to the outlook as two-sided and broadly balanced. Domestically, a softer 2025 recovery due to continued uncertainty and a weak labor marker, weaker-than-expected corporate and household balance sheets, or a natural disaster could delay fiscal consolidation and reveal financial vulnerabilities. Conversely, faster-than-expected monetary policy transmission, higher net migration, and productivity gains from structural reforms could lead to a quicker rebound. As a small open economy, New Zealand is vulnerable to trade disruptions, geopolitical risks, or a global slowdown.

Policies to Support Macroeconomic Stability and Growth

Fiscal policy should balance medium-term consolidation with near-term support to the economy. The positive fiscal impulse in FY2024/25 primarily reflects a structurally weaker fiscal outlook, particularly for tax revenue, as well as the cyclical policy response to soft demand and a negative output gap. While this contributes to a delay in restoring an operating surplus, the government’s policy statement for Budget 2025 appropriately affirms its commitment to the necessary medium-term consolidation to support fiscal sustainability and rebuild fiscal buffers, emphasizing prudent debt levels and strict spending controls.  Expenditure rationalization should utilize a comprehensive cost-benefit analysis of government programs against persistent spending pressures. This should be aimed at preserving high value spending priorities, protecting the most vulnerable, and carefully managing the implementation risks associated with operating allowance caps. Automatic stabilizers can continue to operate if cyclical economic conditions weaken further. Conversely, any revenue overperformance should be saved to prevent additional delays in fiscal consolidation, thus protecting the credibility of the fiscal policy framework.

The authorities’ fiscal strategy should include broader tax policy reforms and initiatives to address long-term spending pressures. New Zealand has an efficient consumption tax system, low labor tax wedge, relatively high corporate income tax, and uneven capital income taxation. Tax policy can support a more growth-friendly fiscal consolidation, and reforms aimed at improving the tax mix can help increase the efficiency of the income tax system while reducing the cost of capital to incentivize investment and foster productivity growth. Options include a comprehensive capital gains tax, a land value tax, and judicious adjustments to the corporate income tax regime. The growth implications and distributional effects of these reforms should be carefully considered to inform the design of policies. In the long term, population aging will increase superannuation costs and place significant pressure on the budget. It is essential to initiate early dialogue among all stakeholders regarding comprehensive reform options that can help mitigate these challenges (and other long-term spending pressures from healthcare and aged care needs) with fair burden-sharing across generations. This can be further supported by KiwiSaver (a voluntary savings scheme) reforms aimed at achieving greater private retirement savings.

If the inflation outlook remains benign, additional rate cuts are warranted. Shrinking demand and rising unemployment have created a negative output gap, and there is some scope for further rate cuts. IMF staff consider lowering the OCR to around 3¼ percent (approximately neutral) by mid-2025 appropriate to keep inflation within the target band, if economic conditions progress as expected. The significant, rapid, and anticipated cuts in monetary policy could cause the passthrough to economic activity to be faster than during previous cycles. Many households have shifted toward short-term fixed-rate mortgages in anticipation of monetary easing, with over 70 percent scheduled to reprice this year. Given the chronic housing shortage, the already high household leverage, and the propensity in New Zealand for rapid housing credit growth, the RBNZ should monitor the effect of its easing and make full use of its macroprudential toolbox to control the emergence of risks. In this context, the activation of debt-to-income limits serves as a guardrail against a buildup of risk, while offering banks limited countercyclical room to lend to higher-risk borrowers. Monetary policy should remain flexible and responsive to the rapidly developing economic conditions. The Reserve Bank is expected to ensure continuity in carrying out its policies and operations amid the changes in its leadership.

Unlocking housing supply growth is a key priority. Ongoing policy work to amend and eventually replace the Resource Management Act has the potential to improve planning efficiency. Bold reforms are needed to free up land supply, incentivize efficient land use, and ensure adequate financing of local infrastructure. Allowing for more construction of high-density housing can also support supply. The government’s nascent Going for Housing Growth program aims to tackle some of these challenges.

Steady progress is being made in implementing reforms to boost financial stability. Implementation of the 2019 capital review is progressing in line with expectations. The Depositor Compensation Scheme is on track for a July 2025 launch, to be funded by a risk-based levy framework which appropriately aligns costs with risks. Public consultations around the prudential standards under the Deposit Takers’ Act are ongoing. Incorporating smaller non-bank deposit-takers into prudential regulation in a proportionate way remains a key consideration. In this context, reforms are expected to include graduated requirements by different entity sizes, reevaluation of minimum capital levels for new entrants, and additional granularity in standardized risk weights.

Government policies to strengthen banking competition will need to be carefully designed to preserve the primacy of financial stability. Encouraging stronger competition for deposits and loans can be achieved through measures including faster adoption of open banking, reducing regulatory barriers to entry, enhancing fee transparency, and making it easier to switch providers. Efforts to attract a private capital injection for Kiwibank could allow the bank to boost its lending activity. The primary objective of prudential regulation should be to safeguard financial stability, calibrated to the risks and vulnerabilities faced by New Zealand.

Enhancing New Zealand's productivity growth requires a comprehensive approach. Refreshing competition settings, including around mergers and anticompetitive conduct, can improve outcomes for consumers and help bring policies in line with international best practices, while accounting for the unique features of New Zealand’s business landscape. Business dynamism could also be enhanced by a broader mix of available financing. Reforms to the Overseas Investment Act should reduce the restrictiveness of the FDI regime to attract foreign capital. Further efforts are needed to accelerate capital markets development, including by encouraging domestic investment across asset classes, particularly through private pension funds. Encouraging innovation, including through R&D tax incentives and public sector R&D, can boost growth in high-productivity industries. A stable long-term project pipeline, coupled with the prudent use of public-private partnerships, can help close the infrastructure gap. Developing a comprehensive national adaptation framework would help build economic resilience to natural disasters.

The mission would like to thank the authorities and counterparts in the private sector, civil society, think tanks, academia, and other organizations for frank and engaging discussions.