Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with New Zealand.
New Zealand’s economy has weathered the COVID-19 shock relatively well. A sound public health response was effective in bringing infection rates quickly under control. While the pandemic and hard lockdown led to an unprecedented decline in activity in the first half of 2020, activity rebounded strongly in the second half on successful virus suppression and unprecedented fiscal and monetary policy support. Due to the ongoing border closure, tourism and education exports are lagging other sectors in the recovery. By contrast, low interest rates together with a structural housing supply shortage have led to rapidly rising house prices and strong construction activity. As in most advanced economies, inflation has remained subdued and the financial system has remained resilient.
Despite expected near-term sluggish growth on account of the missed tourist season, real GDP is projected to grow by 4 percent in 2021, driven by domestic demand. However, the ongoing global pandemic and border closure will continue to depress migration and tourism flows. The unemployment rate is expected to peak at around 5.1 percent, while wage growth should 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.
Key near-term risks to the economic outlook relate to the domestic and global paths of the COVID-19 pandemic. Renewed domestic outbreaks and the potential for health risks to delay the border opening constitute important downside risks to growth, as does COVID-19’s impact on New Zealand’s trading partners and its export commodity prices. By contrast, faster-than-expected vaccine rollout could prompt a faster border reopening and stronger external demand.
Executive Board Assessment [2]
Executive Directors commended the authorities’ successful response to the COVID-19 pandemic. Comprehensive public health measures and economic policies have cushioned the impact on the vulnerable, sustained financial stability, and helped set the stage for a rapid economic recovery. Directors noted, however, that the recovery remains uneven and risks are still elevated. It will, therefore, be necessary for macroeconomic policies to remain accommodative, while accelerating structural reforms to limit scarring, boost productivity, and foster green, inclusive growth.
Directors emphasized the importance of avoiding a premature removal of fiscal and monetary policy support. They welcomed the authorities’ intention to stand ready to deploy additional measures in case downside risks materialize. Directors noted that the pace of policy normalization needs to be calibrated to economic and financial developments. As the recovery strengthens, shifting from job retention to active labor market policies will help mitigate economic scarring and make the recovery more inclusive. Medium-term fiscal targets can be reviewed and updated once the uncertainty subsides.
Directors welcomed the authorities’ comprehensive approach to tackling housing imbalances amid a rapid increase in house prices. They agreed that recently announced measures would help limit near-term house price increases and strengthen housing supply. Directors recommended, as a durable solution, freeing up land supply, improving planning and zoning, and fostering infrastructure investments to enable fast-track housing developments.
Directors highlighted the need to continue monitoring the financial system’s resilience. While the banking system remains well capitalized and liquid, Directors encouraged the authorities to stand ready to deploy additional macroprudential measures when deemed necessary to mitigate financial risks, particularly those related to elevated house prices and banks’ concentrated exposure to the real estate sector. They noted that the ongoing review of the central bank act provides an opportunity to further strengthen the governance and operational autonomy of the Reserve Bank and to equip it with the tools needed to respond flexibly to financial stability risks. Directors stressed the importance of maintaining the focus of monetary policy on its inflation and employment objectives.
Directors encouraged continued efforts to foster durable, inclusive, and green growth. They recommended reforming product markets, expanding research and development spending, and streamlining the approval process for foreign direct investment. Directors called on the authorities to prioritize infrastructure investment, with a focus on reducing infrastructure gaps and supporting a green recovery. They looked forward to the finalization of the authorities’ emissions reduction plan.
Table 1. New Zealand: Main Economic Indictors | |||||||||||
(Annual percent change, unless otherwise indicated) | |||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | |
Projections | |||||||||||
NATIONAL ACCOUNTS | |||||||||||
Real GDP (production) | 3.9 | 3.5 | 3.4 | 2.4 | -2.9 | 4.0 | 3.2 | 2.6 | 2.5 | 2.4 | 2.5 |
Real GDP (expenditure) | 4.2 | 4.0 | 4.3 | 3.0 | -1.1 | 3.0 | 2.8 | 2.5 | 2.4 | 2.4 | 2.3 |
Domestic demand | 4.6 | 5.3 | 5.3 | 2.9 | -2.5 | 5.4 | 2.7 | 2.3 | 2.3 | 2.4 | 2.6 |
Private consumption | 5.9 | 5.6 | 4.4 | 3.6 | -1.8 | 3.7 | 3.4 | 2.7 | 2.5 | 2.8 | 3.1 |
Public consumption | 2.0 | 3.4 | 3.4 | 5.4 | 5.8 | 2.2 | 0.9 | 0.8 | 0.9 | 0.6 | 0.8 |
Investment | 3.5 | 5.7 | 9.0 | 0.3 | -10.3 | 9.5 | 2.7 | 2.3 | 2.9 | 2.7 | 2.5 |
Public | -1.1 | 7.1 | 3.8 | -0.6 | -4.8 | 5.6 | 0.6 | -0.6 | 2.1 | 1.8 | 1.8 |
Private | 4.6 | 4.2 | 8.5 | 4.3 | -8.3 | 6.5 | 3.3 | 3.1 | 3.1 | 3.0 | 2.7 |
Private business | 1.3 | 7.3 | 12.3 | 4.1 | -10.1 | 3.1 | 3.2 | 2.8 | 3.2 | 3.1 | 2.7 |
Dwelling | 11.4 | -1.5 | 1.2 | 5.0 | -4.4 | 13.4 | 3.5 | 3.8 | 3.0 | 2.7 | 2.7 |
Inventories (contribution to growth, percent) | 0.1 | 0.2 | 0.4 | -0.7 | -0.7 | 0.6 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Net exports (contribution to growth, percent) | -0.5 | -1.7 | -1.4 | -0.1 | 2.1 | -2.8 | -0.2 | 0.1 | 0.0 | -0.2 | -0.4 |
Real gross domestic income | 4.6 | 5.4 | 3.7 | 3.0 | -0.9 | 3.6 | 2.6 | 2.1 | 2.1 | 2.5 | 2.4 |
Investment (percent of GDP) | 23.1 | 23.5 | 24.6 | 24.0 | 21.7 | 23.3 | 23.3 | 23.3 | 23.5 | 23.6 | 23.6 |
Public | 5.3 | 5.4 | 5.4 | 5.3 | 5.0 | 5.1 | 5.1 | 4.9 | 4.9 | 4.9 | 4.8 |
Private | 17.8 | 18.0 | 19.2 | 18.7 | 16.6 | 18.1 | 18.2 | 18.4 | 18.6 | 18.7 | 18.7 |
Savings (gross, percent of GDP) | 20.9 | 20.5 | 20.4 | 20.7 | 20.9 | 21.2 | 21.2 | 20.9 | 20.8 | 20.8 | 20.8 |
Public | 1.0 | 1.3 | 1.1 | -2.3 | -5.9 | -5.5 | -4.2 | -2.9 | -1.7 | -0.6 | -0.1 |
Private | 19.9 | 19.2 | 19.3 | 23.0 | 26.8 | 26.7 | 25.4 | 23.9 | 22.5 | 21.4 | 20.9 |
Potential output | 3.0 | 2.9 | 2.9 | 2.9 | 1.8 | 1.5 | 1.9 | 2.2 | 2.3 | 2.4 | 2.5 |
Output gap (percent of potential) | 0.0 | 0.6 | 1.0 | 0.6 | -4.2 | -1.8 | -0.6 | -0.2 | 0.0 | 0.0 | 0.0 |
LABOR MARKET | |||||||||||
Employment | 4.8 | 4.2 | 2.9 | 1.3 | 1.4 | 0.1 | 1.3 | 1.3 | 1.6 | 1.6 | 1.4 |
Unemployment (percent of labor force) | 5.2 | 4.7 | 4.3 | 4.1 | 4.6 | 5.1 | 4.9 | 4.7 | 4.5 | 4.4 | 4.4 |
Wages (nominal percent change) | 1.9 | 2.1 | 3.1 | 3.9 | 3.6 | 1.9 | 2.5 | 3.1 | 3.5 | 3.5 | 3.7 |
PRICES | |||||||||||
Terms of trade index (goods, % change) | 1.1 | 7.3 | -1.7 | 0.3 | 3.0 | 2.7 | -1.1 | -1.9 | -1.6 | -0.1 | -0.1 |
Consumer prices (avg, % change) | 0.6 | 1.9 | 1.6 | 1.6 | 1.7 | 1.8 | 1.6 | 1.7 | 2.1 | 2.1 | 2.2 |
GDP deflator (avg, % change) | 1.8 | 3.3 | 1.2 | 2.2 | 2.2 | 1.8 | 1.5 | 1.4 | 1.9 | 2.2 | 2.3 |
MACRO-FINANCIAL | |||||||||||
Official cash rate (policy rate, percent, avg) | 2.2 | 1.8 | 1.8 | 1.4 | 0.4 | 0.3 | 0.3 | 0.3 | 0.6 | 1.1 | 1.6 |
Credit to the private sector (percent change) | 7.0 | 4.9 | 5.4 | 5.6 | 3.9 | 5.2 | 5.0 | 5.4 | 5.2 | 4.5 | 3.8 |
Interest payments (percent of disposable income) | 8.1 | 7.7 | 7.5 | 7.1 | 6.2 | 6.4 | 6.5 | 6.6 | 7.4 | 8.1 | 8.6 |
Household savings (percent of disposable income) | 3.2 | 3.3 | 3.2 | 3.4 | 3.6 | 3.5 | 3.2 | 3.2 | 3.0 | 3.0 | 3.0 |
Household debt (percent of disposable income) | 159 | 159 | 158 | 160 | 166 | 167 | 169 | 171 | 172 | 171 | 169 |
GENERAL GOVERNMENT (percent of GDP) 1/ | |||||||||||
Revenue | 37.5 | 36.9 | 37.3 | 36.5 | 36.7 | 36.0 | 35.7 | 36.0 | 36.3 | 36.6 | 36.9 |
Expenditure | 36.5 | 35.6 | 36.2 | 38.8 | 42.7 | 41.5 | 39.9 | 38.9 | 37.9 | 37.3 | 37.0 |
Net lending/borrowing | 1.0 | 1.3 | 1.1 | -2.3 | -5.9 | -5.5 | -4.2 | -2.9 | -1.7 | -0.6 | -0.1 |
Operating balance | 2.6 | 3.0 | 3.2 | -0.4 | -3.7 | -2.8 | -1.7 | -0.8 | 0.1 | 1.1 | 1.6 |
Cyclically adjusted balance 2/ | 1.7 | 1.7 | 1.4 | -1.1 | -3.9 | -3.9 | -2.8 | -1.6 | -0.3 | 0.7 | 1.2 |
Gross debt | 33.4 | 31.1 | 28.1 | 32.1 | 43.1 | 49.9 | 53.9 | 55.9 | 56.1 | 54.4 | 52.1 |
Net debt | 6.6 | 5.5 | 4.7 | 7.0 | 14.9 | 22.3 | 26.3 | 28.2 | 27.7 | 25.9 | 23.7 |
Net worth | 85.6 | 89.5 | 92.4 | 86.6 | 78.5 | 70.8 | 66.9 | 65.4 | 65.5 | 65.8 | 65.6 |
BALANCE OF PAYMENTS | |||||||||||
Current account (percent of GDP) | -2.2 | -3.0 | -4.2 | -3.3 | -0.8 | -2.1 | -2.1 | -2.4 | -2.7 | -2.8 | -2.8 |
Export volume | 2.4 | 2.5 | 2.8 | 2.3 | -12.1 | -0.5 | 8.4 | 5.0 | 4.6 | 3.5 | 3.1 |
Import volume | 3.8 | 7.3 | 6.5 | 2.2 | -16.3 | 9.3 | 7.2 | 3.6 | 3.7 | 3.4 | 3.6 |
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$) | 18.2 | 20.3 | 17.6 | 17.0 | 13.0 | … | … | … | … | … | … |
MEMORANDUM ITEMS | |||||||||||
Nominal GDP (bn NZ$) | 267 | 287 | 303 | 319 | 322 | 337 | 352 | 366 | 382 | 400 | 418 |
Percent change | 6.0 | 7.5 | 5.6 | 5.3 | 1.0 | 4.8 | 4.3 | 3.9 | 4.3 | 4.6 | 4.7 |
Nominal GDP per capita (US$) | 39,428 | 42,330 | 42,803 | 42,166 | 41,127 | 47,499 | 49,027 | 50,522 | 52,329 | 54,302 | 56,341 |
Real gross national disposable income per capita (NZ$) | 50,225 | 51,374 | 52,372 | 53,537 | 52,499 | 54,068 | 55,006 | 55,304 | 55,587 | 55,950 | 57,807 |
Percent change | 3.0 | 2.3 | 1.9 | 2.2 | -1.9 | 3.0 | 1.7 | 0.5 | 0.5 | 0.7 | 3.3 |
Population (million) | 4.7 | 4.8 | 4.9 | 5.0 | 5.1 | 5.1 | 5.2 | 5.3 | 5.3 | 5.4 | 5.5 |
US$/NZ$ (average level) | 0.697 | 0.711 | 0.693 | 0.659 | 0.650 | … | … | … | … | … | … |
Nominal effective exchange rate | 109.6 | 111.1 | 106.8 | 105.2 | 103.8 | … | … | … | … | … | … |
Real effective exchange rate | 105.8 | 107.4 | 102.9 | 101.3 | 100.5 | … | … | … | … | … | … |
Sources: Authorities’ data and IMF staff estimates and projections | |||||||||||
1/ Calendar year. | |||||||||||
2/ In percent of potential GDP. | |||||||||||
[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .