IMF Executive Board Concludes 2017 Article IV Consultation with New Zealand

IMF News, May 8, 2017

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On May 3, 2017, the IMF Executive Board concluded the Article IV Consultation with New Zealand.
Since early 2011 New Zealand experienced an economic expansion that gained further broad-based momentum in 2016, with GDP growth accelerating to 4 percent and the output gap roughly closing.
Reconstruction spending after the 2011 Canterbury earthquake, accommodative monetary policy, a net migration wave, improving services exports, and strong terms of trade were cited as key expansion drivers.

Findings:
- GDP growth accelerated to 4 percent in 2016.
- The output gap was assessed as roughly closing in 2016.
- Unemployment fluctuated around the natural rate of unemployment of 5 percent in 2016.
- Strong employment growth absorbed the migration-induced increase in the labor force.
- Headline inflation edged up into the RBNZ’s target range of 1 to 3 percent.
- Inflation is expected to stabilize at the midpoint of the target range going forward.
Risks and near-term outlook:
- Some weakening in Q4 2016 due to softer private consumption and a sharp drop in exports was expected to be temporary, with growth rebounding and then moderating toward trend as net migration normalizes.

Current stance and recent measures:
- Monetary policy remained accommodative: the RBNZ lowered the policy rate in three 25 basis point steps to 1.75 percent in 2016.
- A third round of macroprudential measures was identified as likely the main driver for some cooling in housing market conditions toward the end of 2016.
Executive Directors’ view:
- The accommodative monetary policy stance was considered appropriate for addressing low inflation.
- The RBNZ’s readiness to adjust policy in either direction if warranted was welcomed.
- Broadening the macro‑prudential toolkit was recommended; an instrument related to debt‑to‑income ratios was suggested to directly target household‑related risks and should be activated if effects of recent macroprudential measures proved temporary.

Observations:
- Real house prices increased by more than 10 percent in 2016.
- Housing credit growth remained strong.
- Loans with high loan-to-value ratios decreased, while debt-to-income ratios for new loans increased.
- Household savings fell alongside rising household wealth.
- The household debt-to-income ratio stands at 168 percent.
Measures and expected moderating factors:
- Tighter macroprudential policies, higher interest rates, lower net migration, and increasing housing supply were expected to moderate house price inflation and stabilize household debt vulnerabilities in the medium term.
Policy suggestions:
- Directors highlighted that further tax measures related to housing could be considered to reduce incentives for leveraged real estate investments by households and help redirect savings to other investments to support deeper capital markets.

Assessments:
- The current account deficit generally remained below its longer-term average during the expansion.
- The current account was assessed to be moderately below its fundamental level, with the exchange rate moderately overvalued.
- The net foreign liability ratio was noted among the highest in advanced economies but broadly stable.
- Commercial banks intermediate much of the foreign liabilities domestically; the four biggest banks are subsidiaries of large Australian banks, contributing to stable external funding.

Outlook and metrics:
- The counter-cyclical fiscal stance going forward was expected to balance the macroeconomic policy mix.
- The fiscal position was expected to strengthen further, with net debt decreasing to below 20 percent of GDP in 2020/21.
Executive Directors’ view:
- Directors welcomed the authorities’ focus on strengthening fiscal buffers while investing in infrastructure and other growth‑friendly initiatives.
- They supported the planned slightly contractionary stance to help balance macroeconomic policies in an economy operating broadly at capacity.

Stability assessment:
- Directors agreed New Zealand’s banking system remains sound and resilient to severe shocks, reflected in the Financial Sector Stability Assessment (FSSA).
Recommendations:
- Pursue structural upgrades to oversight and crisis resolution regimes recommended in the FSSA.
- Increase the weight of regulatory discipline relative to self and market discipline in New Zealand's three‑pillar approach to bank and insurance supervision.
- Enhance the credibility of the Open Bank Resolution framework to add to financial system resilience.

Priorities:
- Strengthen macrofinancial resilience and harness opportunities from strong economic and population growth.
- Measures to lift potential growth should focus on leveraging benefits from high net migration and interconnectedness.
- Implement productivity-enhancing tax reforms and ensure additional support for innovation to provide a basis for further diversification.

IMF Executive Board Concludes 2017 Article IV Consultation with New Zealand — Press Release No. 17/153