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2018 Article IV Consultation with New Zealand

IMF Executive Board Concludes 2018 Article IV Consultation with New Zealand

July 3, 2018

On June 25, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with New Zealand.

Since 2011, New Zealand has enjoyed an economic expansion with notable momentum. Reconstruction spending after the 2011 and 2016 earthquakes was an important catalyst, but the expansion has also been supported by accommodative monetary policy, a net migration wave, improving services exports (especially tourism), and stronger terms of trade.

GDP growth in 2017 at 3 percent was close to trend, rebounding mid-year as weather-related and other temporary factors subsided, but below the buoyant rates of around 4 percent in 2014 16. The unemployment rate declined to near the natural rate of unemployment of roughly 4.5 percent by the end of 2017, as strong employment growth absorbed the migration-induced increase in the labor force. While the latter also contained wage pressures, headline inflation remained within the Reserve Bank of New Zealand (RBNZ)’s target range of 1 to 3 percent. After a bounce in early 2017, mostly because of commodity price increases, headline inflation moderated in the remainder of the year, partly reflecting renewed downward pressures on prices for imported goods and services.

The current account deficit has remained generally below its longer-term average in the expansion. It is assessed to be moderately below its fundamental level, with the exchange rate moderately overvalued. The net foreign liability to GDP ratio, among the highest in advanced economies, has been broadly stable. Commercial banks continue to hold strong capital and liquidity buffers. Slower credit and stronger deposit growth have helped to reduce reliance on offshore market funding reliance.

The housing market is cooling and credit growth to households has slowed. The cooling appears to reflect the RBNZ’s macroprudential policy intervention of late 2016, as well as possibly weaker foreign demand and self-correction in response to declining affordability. Together with tightening in bank lending standards, growth in household credit moderated in turn, broadly in line with nominal income growth. The household debt-to-income ratio, while still high, has stabilized around 168 percent.

Monetary policy remains accommodative, with the RBNZ policy rate being held at 1.75 percent since late 2016. The countercyclical fiscal stance going forward will balance the macroeconomic policy mix, and the fiscal position is expected to strengthen further, with net debt falling below 20 percent of GDP by FY2022/23. Macroprudential policies have contributed to reducing related risks to financial stability and should continue to mitigate risks from high household debt, even with a very slight easing in loan-to-value ratio restrictions at the start of 2018.

The election of a new government has led to new macrostructural policies. There will be a new system of tax credits to foster research and development (R&D). A three-year increase in the minimum wage to NZ$20.00 will be phased in, giving New Zealand the second-highest minimum-to-median wage ratio in the OECD. Students in tertiary education will now receive one year of government funding. Finally, a NZ$1 billion per year Provincial Growth Fund will foster regional development over the next three years.

Executive Board Assessment [2]

Executive Directors commended the authorities for prudent macroeconomic policies leading to New Zealand’s continued solid economic growth. While the outlook remains favorable and near-term risks are broadly balanced, medium-term risks are tilted to the downside including tighter-than-expected global financial conditions and growing protectionist policies in other countries. Against this background, Directors encouraged continued sound policy implementation and reforms to support inclusive growth.

Directors agreed that current macroeconomic policy settings are broadly appropriate and welcomed the authorities’ readiness to adjust the policy mix if needed. They viewed the monetary policy stance as sufficiently expansionary to address current, below-target inflation and to lower risks to demand from currency overvaluation. Directors concurred that the strong fiscal position provides space to accommodate the needs from robust population growth, while the pace of debt reduction envisaged in the FY2018/19 budget is appropriately ambitious. They encouraged using stronger structural revenues to increase spending on infrastructure, human capital development, and other public services that would raise potential output.

Directors noted that macroprudential policies have contributed to reducing risks to financial stability and should continue to mitigate risks from high household debt. Bank and household balance sheets have become more resilient with a lower share of loans with high loan-to-value ratios (LVRs). With household debt still elevated, Directors generally did not see further relaxation of LVR restrictions as appropriate in the near term.

Directors welcomed the Review of the Reserve Bank Act. Regarding Phase One of the review, they encouraged maintenance of the employment objective as the updated framework is legislated and fully implemented. Directors saw Phase Two of the Review, focused on financial stability and other policies, as an opportunity to better define the mandate and objectives for the Reserve Bank of New Zealand in this domain. They encouraged the authorities to give emphasis to priority areas in need of reform, such as the macroprudential toolkit and the supervisory pillar suggested in the 2017 Financial Sector Assessment Program.

Directors concurred that the ambitious housing policy agenda centered on strengthening supply and lowering tax distortions will help to restore broad-based housing affordability. They emphasized that the success of the agenda will depend on well-coordinated progress of the KiwiBuild program and the Urban Growth Agenda across the public sector. Many Directors noted the proposed ban of residential real estate purchases by nonresidents, which is assessed as a capital flow management measure under the Fund’s Institutional View, and encouraged the authorities to reconsider the measure. They considered that this measure would be unlikely to improve housing affordability, while the broad housing policy agenda, if fully implemented, would likely address most of the potential problems associated with foreign buyers on a non-discriminatory basis. A number of Directors, however, saw merit in taking into account the social and political economy considerations in the assessment, or did not think that the proposed ban would have a material impact on the balance of payments.

Directors welcomed the government’s structural policy agenda, which seeks to support productive, sustainable, and inclusive growth. They noted that an R&D tax credit, if well designed, could be an efficient instrument to support innovation in the business sector, while tax reform could play an important role in shifting incentives toward broader business investment. Directors welcomed the authorities’ ongoing commitment to open, multilateral trade integration.

New Zealand: Main Economic Indicators, 2013-2023
(Annual percent change, unless otherwise indicated)
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Est. Projections
NATIONAL ACCOUNTS
Real GDP (production) 2.2 3.6 3.5 4.0 2.9 3.1 3.2 3.1 2.9 2.7 2.6
Real GDP (expenditure) 2.2 3.2 4.2 4.2 3.0 3.2 3.2 3.1 2.9 2.7 2.6
Domestic demand 3.7 4.5 3.2 4.7 4.0 4.9 3.1 3.1 2.8 2.6 2.4
Private consumption 3.5 3.2 3.8 5.0 4.5 3.8 3.1 3.0 2.7 2.4 2.4
Public consumption 1.4 3.3 2.7 1.7 4.7 3.9 1.8 1.5 1.5 1.5 1.5
Investment 6.6 11.2 2.8 6.3 3.3 4.3 4.0 4.3 4.1 3.6 3.1
Public 7.0 6.5 6.1 -2.9 -0.3 9.0 2.0 1.5 1.5 1.2 1.2
Private 8.2 10.6 3.7 9.7 4.4 3.7 4.6 5.1 4.9 4.2 3.6
Private business 3.9 11.1 2.5 8.6 6.4 4.8 5.2 5.1 4.8 4.2 3.8
Dwelling 17.7 9.8 6.0 11.8 0.6 1.4 3.3 5.3 5.2 4.2 3.3
Inventories (contribution to growth, percent) -0.2 0.4 -0.3 0.0 0.0 -0.2 0.0 0.0 0.0 0.0 0.0
Net exports (contribution to growth, percent) -1.6 -1.6 0.8 -0.6 -1.4 -1.5 -0.1 -0.2 -0.1 -0.1 0.0
Real gross domestic income 4.4 5.2 2.0 4.6 4.3 4.5 3.2 3.1 2.9 2.7 2.7
Investment (percent of GDP) 21.9 22.7 23.1 23.7 23.8 24.3 24.6 25.0 25.4 25.6 25.8
Public 5.6 5.7 5.9 5.5 5.3 5.6 5.6 5.5 5.4 5.4 5.3
Private 16.3 17.1 17.2 18.2 18.5 18.7 19.1 19.5 20.0 20.3 20.5
Savings (gross, percent of GDP) 19.0 19.5 20.0 21.4 21.0 21.6 21.8 22.0 22.4 22.6 22.8
Public 3.3 4.0 4.1 1.2 1.4 0.8 0.9 1.3 1.6 2.0 2.0
Private 15.8 15.4 16.1 20.2 19.6 20.8 20.8 20.7 20.8 20.6 20.8
Potential output 2.4 2.6 2.8 3.0 3.0 3.0 3.0 2.9 2.8 2.7 2.7
Output gap (percent of potential) -2.4 -1.6 -0.9 0.1 0.0 0.1 0.3 0.4 0.6 0.5 0.4
LABOR MARKET
Employment 1.5 3.5 2.2 4.6 4.1 2.8 1.8 1.4 1.3 1.3 1.4
Unemployment (percent of labor force) 5.8 5.4 5.4 5.1 4.7 4.5 4.5 4.4 4.3 4.3 4.4
Wages (nominal percent change) 2.4 2.5 2.3 1.9 2.1 2.9 2.1 2.5 2.5 2.4 2.6
PRICES
Terms of trade index (goods, % change) 8.5 5.6 -5.0 1.2 6.6 2.1 -0.6 0.1 0.0 0.1 0.5
Consumer prices (avg, % change) 1.1 1.2 0.3 0.6 1.9 1.4 1.7 1.9 2.0 2.0 2.0
GDP deflator (avg, % change) 3.2 1.9 0.8 1.9 3.6 2.7 2.0 2.0 2.0 2.1 2.0
MACRO-FINANCIAL
Official cash rate (policy rate, percent, avg) 2.5 3.1 3.2 2.2 1.8 1.8 1.8 2.1 2.4 2.9 3.0
Credit to the private sector (percent change) 5.1 4.5 8.4 7.3 4.9 5.1 5.3 5.1 5.0 5.0 4.7
House prices (percent change, avg) 9.0 6.5 11.6 13.0 6.4 4.5 4.5 4.2 4.0 4.0 4.0
Interest payments (percent of disposable income) 8.4 9.0 9.3 8.5 8.4 8.6 8.8 9.1 9.3 9.5 9.8
Household savings (percent of disposable income) 3.3 2.1 2.0 2.2 2.4 2.6 2.8 3.0 3.1 3.3 3.5
Household debt (percent of disposable income) 151 155 161 167 168 166 165 163 161 160 159
GENERAL GOVERNMENT (percent of GDP) 1/
Revenue 37.3 37.2 37.7 37.6 37.2 37.0 37.1 37.2 37.2 37.3 37.3
Expenditure 38.5 37.7 37.3 36.4 35.8 36.2 36.1 35.9 35.6 35.3 35.3
Net lending/borrowing -1.3 -0.5 0.3 1.2 1.4 0.8 0.9 1.3 1.6 2.0 2.0
Operating balance 0.2 1.0 1.9 2.7 3.0 2.9 2.9 3.0 3.1 3.3 3.3
Cyclically adjusted balance 0.4 0.7 1.2 1.9 2.3 1.8 1.8 2.1 2.3 2.7 2.7
Gross debt 34.6 34.2 34.3 33.5 31.7 30.0 29.0 28.1 27.6 26.2 23.0
Net debt 11.0 10.4 9.8 9.1 8.6 10.0 11.0 10.8 10.2 8.1 4.9
Net worth 87.5 89.1 90.7 93.0 86.0 75.9 74.7 73.4 71.5 71.2 72.1
BALANCE OF PAYMENTS
Current account (percent of GDP) -3.2 -3.2 -3.1 -2.3 -2.7 -2.6 -2.9 -3.0 -3.0 -3.0 -3.0
Export volume 0.8 3.1 7.0 1.5 2.6 2.7 3.9 4.0 4.3 4.3 4.1
Import volume 6.2 7.9 3.8 3.3 6.6 6.7 3.6 3.8 3.8 3.7 3.5
Net international investment position (percent of GDP) -64.4 -65.3 -61.3 -59.3 -54.8 -54.3 -54.5 -54.8 -55.2 -55.7 -56.2
Gross official reserves (bn US$) 16.5 15.8 14.3 18.2 20.3
MEMORANDUM ITEMS
Nominal GDP (bn NZ$) 228 241 251 266 283 300 316 332 349 366 383
Percent change 5.5 5.5 4.4 6.0 6.6 5.9 5.2 5.2 5.0 4.8 4.7
Nominal GDP per capita (US$) 41,777 43,876 37,825 39,050 41,591 44,508 46,340 48,413 50,598 52,854 54,985
Real gross national disposable income per capita (NZ$) 46,491 47,896 48,204 49,851 50,560 51,808 52,176 52,741 53,365 53,916 54,538
Percent change 3.2 3.0 0.6 3.4 1.4 2.5 0.7 1.1 1.2 1.0 1.2
Population (million) 4.4 4.5 4.6 4.6 4.7 4.8 4.9 5.0 5.1 5.2 5.3
US$/NZ$ (average level) 0.821 0.831 0.700 0.697 0.711
Nominal effective exchange rate 112.3 116.6 111.2 112.0 113.3
Real effective exchange rate 111.5 115.2 109.3 109.6 111.0
Sources: Authorities’ data and IMF staff estimates and projections.
1/ Calendar year.


________________________________________

[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: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

2018 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR NEW ZEALAND

cr18202.pdf


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