IMF Executive Board Concludes 2021 Article IV Consultation with New Zealand

IMF News, May 5, 2021

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Published: May 5, 2021

Overview

The Executive Board concluded the Article IV consultation with New Zealand on May 5, 2021.
New Zealand’s economy weathered the COVID-19 shock relatively well due to a sound public health response that quickly brought infection rates under control.
The pandemic and hard lockdown caused an unprecedented decline in activity in the first half of 2020, followed by a strong rebound in the second half of 2020 on successful virus suppression and unprecedented fiscal and monetary policy support.
Ongoing border closure continues to depress tourism and education exports relative to other sectors.
Low interest rates combined with a structural housing supply shortage have led to rapidly rising house prices and strong construction activity.
Inflation has remained subdued and the financial system has remained resilient.

Outlook and Projections

Real GDP is projected to grow by 4 percent in 2021, driven by domestic demand.
The unemployment rate is expected to peak at around 5.1 percent.
Wage growth is expected to remain modest.
Inflation could experience temporary increases in the near term but, with output and employment below potential, is expected to durably reach the two-percent midpoint of the Reserve Bank of New Zealand (RBNZ)’s target range only from 2024.
Ongoing border closure will continue to depress migration and tourism flows.

Key Near-Term Risks

Domestic and global paths of the COVID-19 pandemic are key risks.
Renewed domestic outbreaks and health risks that delay border reopening are important downside risks to growth.
COVID-19’s impact on New Zealand’s trading partners and export commodity prices is a downside risk.
Faster-than-expected vaccine rollout could lead to faster border reopening and stronger external demand (upside risk).

Executive Board Assessment and Policy Guidance

Directors commended the authorities’ successful public health and economic policy response that cushioned the vulnerable, sustained financial stability, and set the stage for a rapid recovery.
Recovery remains uneven and risks are elevated; macroeconomic policies should remain accommodative while accelerating structural reforms to limit scarring, boost productivity, and foster green, inclusive growth.
Avoid premature removal of fiscal and monetary support; authorities should stand ready to deploy additional measures if downside risks materialize.
Pace of policy normalization should be calibrated to economic and financial developments.
Shift from job retention to active labor market policies as recovery strengthens to mitigate scarring and make recovery more inclusive.
Medium-term fiscal targets can be reviewed and updated once uncertainty subsides.
Directors welcomed measures to tackle housing imbalances and recommended durable solutions: freeing up land supply, improving planning and zoning, and fostering infrastructure investments to enable fast-track housing developments.
Continue monitoring financial system resilience; banking system remains well capitalized and liquid.
Authorities encouraged to stand ready to deploy additional macroprudential measures to mitigate financial risks related to elevated house prices and banks’ concentrated exposure to the real estate sector.
Ongoing review of the central bank act seen as an opportunity to strengthen the governance and operational autonomy of the Reserve Bank and to equip it with tools to respond flexibly to financial stability risks.
Directors stressed maintaining the focus of monetary policy on inflation and employment objectives.
Recommended reforms to foster durable, inclusive, and green growth: reform product markets, expand research and development spending, streamline approval process for foreign direct investment, prioritize infrastructure investment (with a focus on reducing infrastructure gaps and supporting a green recovery), and finalize the authorities’ emissions reduction plan.

Selected Key Statistics and Projections (annual percent change or as indicated)

Real GDP (production): 3.9; 3.5; 3.4; 2.4; -2.9; 4.0; 3.2; 2.6; 2.5
Real GDP (expenditure): 4.2; 4.3; 3.0; -1.1; 2.8; 2.3
Domestic demand: 4.6; 5.3; 2.9; -2.5; 5.4; 2.7
Private consumption: 5.9; 5.6; 4.4; 3.6; -1.8; 3.7; 3.1
Investment (percent of GDP): 23.1; 23.5; 24.6; 24.0; 21.7; 23.3; 23.6
Gross debt (percent of GDP): 33.4; 31.1; 28.1; 32.1; 43.1; 49.9; 53.9; 55.9; 56.1; 54.4; 52.1
Current account (percent of GDP): -2.2; -3.0; -3.3; -2.1; -2.4; -2.7
Net international investment position (percent of GDP): -57.4; -52.1; -55.9; -53.7; -55.0; -54.5; -54.4; -54.7; -55.1; -55.4; -55.8
Gross official reserves (bn US$): 20.3; 17.6; 17.0; 13.0; …
Nominal GDP (bn NZ$): 267; 287; 303; 319; 322; 337; 352; 366; 382; 400; 418
Nominal GDP per capita (US$): 39,428; 42,330; 42,803; 42,166; 41,127; 47,499; 49,027; 50,522; 52,329; 54,302; 56,341
US$/NZ$ (average level): 0.697; 0.711; 0.693; 0.659; 0.650
Official household debt (percent of disposable income): 159; 158; 160; 166; 167; 169; 171; 172

Source: IMF Executive Board Concludes 2021 Article IV Consultation with New Zealand (Press Release No. 21/120), IMF Communications Department, May 5, 2021.

IMF Executive Board Concludes 2021 Article IV Consultation with New Zealand

Source details

Other formats

Bibliographic details

Overview

Outlook and Projections

Key Near-Term Risks

Executive Board Assessment and Policy Guidance

Selected Key Statistics and Projections (annual percent change or as indicated)

References