This 2003 Article IV Consultation highlights that despite significant slowdowns in activity in some major overseas markets, New Zealand has maintained a strong pace of economic growth over the past three years. The economy’s performance reflected its enhanced flexibility, stemming from the structural reforms of the 1980s and 1990s. After falling sharply in 1999 and 2000, the value of the New Zealand dollar stabilized during 2001, before appreciating substantially in 2002 and into early 2003. The fiscal surplus rose in 2001/02 and is expected to strengthen further over the medium term.

Abstract

This 2003 Article IV Consultation highlights that despite significant slowdowns in activity in some major overseas markets, New Zealand has maintained a strong pace of economic growth over the past three years. The economy’s performance reflected its enhanced flexibility, stemming from the structural reforms of the 1980s and 1990s. After falling sharply in 1999 and 2000, the value of the New Zealand dollar stabilized during 2001, before appreciating substantially in 2002 and into early 2003. The fiscal surplus rose in 2001/02 and is expected to strengthen further over the medium term.

1. This statement contains information that has become available since the Staff Report (SM/03/107) was circulated to the Executive Board on March 28, 2003. This information does not alter the thrust of the staff appraisal.

2. New data indicate that the pace of economic activity was stronger than expected in the December 2002 quarter; real GDP grew by 0.8 percent, raising the annual average growth rate in 2002 to 4.4 percent. Growth in the quarter was driven by strong consumer spending and increased business investment. Housing investment, which had been an important contributor to growth in previous quarters, slowed sharply. The current account deficit widened further in the December 2002 quarter reaching 4½ percent of GDP; for the year 2002, the deficit rose to over 3 percent of GDP from around 2¾ percent in 2001.

3. Recent economic indicators generally have been consistent with an expected slowdown in the pace of economic activity in 2003. Consumer and business confidence has declined; new residential building consents have fallen; retail sales growth has eased; and advertised job vacancies have declined. The outlook for GDP growth in 2003 remains broadly unchanged at 2¾ percent. Although uncertainties associated with the military conflict in Iraq have diminished, some additional downside risks have emerged, including the impact on trade and tourism of the outbreak in Asia of Severe Acute Respiratory Syndrome and recent dry weather conditions in some parts of New Zealand, which could have adverse implications for agricultural and hydroelectric power production.

4. Inflation declined slightly in the March 2003 quarter, with consumer prices rising at a 2½ percent rate (year-on-year), compared to nearly a 2¾ percent rate in the December 2002 quarter. Both tradables and nontradables inflation declined. In late April 2003, the New Zealand dollar was largely unchanged from its level at end-February against the U.S. dollar and only slightly lower on a trade-weighted basis.

5. Following its scheduled review of the overnight cash rate (OCR) on April 23, the Reserve Bank of New Zealand (RBNZ) announced a rate cut of 25 basis points to 5½ percent. In the announcement, the RBNZ’s Governor noted that conditions set in January 2003 for a cut in the OCR (the exchange rate remaining unchanged or appreciating further and evidence of reduced pressures on resources and medium-term inflation) had been met. Available data suggested that growth in the New Zealand economy was slowing as the RBNZ expected, and the Bank was more confident that inflationary pressures would ease. The Governor stated that the new Policy Targets Agreement requires the Bank to avoid unnecessary instability in output, interest rates, and the exchange rate. Accordingly, the RBNZ had been prepared to adjust interest rates a little faster in response to the evidence of a slowdown. However, any further easings in monetary policy would depend on evidence continuing to suggest that inflation would settle comfortably within the official target range over the medium term.

New Zealand: Staff Report for the 2003 Article IV Consultation
Author: International Monetary Fund