On June 25, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 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.
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.
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.