IMF Concludes 2022 Article IV Consultation with New Zealand

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with New Zealand on May 13, 2022 and endorsed the staff appraisal without a meeting on a lapse-of-time basis.[2]

New Zealand has reached a strong cyclical position as a result of successful management of the pandemic and significant policy support. Strong public health policies and border controls helped contain the COVID-19 waves in 2020 and 2021, and high vaccination rates have allowed a shift to a living-with-COVID strategy during the current Omicron wave. The economy rebounded strongly in 2021, growing 5.6 percent, aided by significant fiscal support and accommodative monetary policy. As a result, the labor market tightened significantly, with historically low unemployment and rising wage pressures in the face of labor shortages, exacerbated by border closures. Inflation has risen significantly above the Reserve Bank of New Zealand’s (RBNZ) target range, driven by higher food and energy costs, supply chain disruptions, surging house prices, and rising wages. Record low mortgage rates, easy credit availability, and COVID-related pent-up demand in the face of inelastic supply, boosted house prices significantly, which in turn has rapidly reduced housing affordability.

Economic growth is set to slow to about 2.7 percent in 2022, reflecting withdrawal of COVID-19 related policy support, the global economic slowdown, and temporary setbacks from the ongoing COVID wave. The housing market has turned, and house prices are expected to continue slowing as interest rates increase, credit conditions tighten, and supply improves. The unemployment rate will likely remain very low given labor shortages, with a further pickup expected in wage growth. High commodity prices due to the war in Ukraine, persistent supply chain disruptions, and New Zealand’s tight labor market will likely contribute to inflation staying above the RBNZ’s target range in 2022-23.

Downside risks dominate in the near and medium term. Near-term risks to the outlook include further outbreaks of COVID-19 variants and an intensification of geopolitical tensions, which could adversely affect economic activity, add to global supply chain disruptions, and push inflation higher. Slower-than-expected growth in China is a risk to New Zealand given strong trading links. The housing market also constitutes a risk in view of borrowers’ vulnerability to rising mortgage rates, high household debt, and banks’ exposure to housing.

Executive Board Assessment

In concluding the 2022 Article IV consultation with New Zealand, Executive Directors endorsed the staff’s appraisal, as follows:

New Zealand managed the transition to living with COVID well. Strong health and economic policies supported quick recovery from lockdowns in 2021. Following a slow start, swift progress in the vaccination campaign has offered a pathway to a new normal. The expected border reopening will provide an additional economic boost to the tourism and education sectors. Still, economic growth is expected to moderate this year, reflecting policy tightening, global spillovers, and the ongoing Omicron wave. Amid commodity price pressures related to the war in Ukraine, continued supply chain disruptions, and a tight labor market, inflation is expected to remain high and stay well above the RBNZ’s target range this year. Overall, the outlook remains highly uncertain, contingent on the trajectory of the pandemic and geopolitical developments.

The path of macroeconomic policy normalization needs to be calibrated to evolving economic conditions. With output above potential and stronger-than-expected inflation, the authorities are appropriately withdrawing fiscal and monetary support. Under baseline expectations for growth and inflation, the pace of planned policy support withdrawal is adequate. That said, the pace should be adjusted nimbly in case upside or downside risks materialize.

Fiscal policy should remain agile amid continued uncertainty . While the scheduled tightening of fiscal policy is appropriate, the authorities should calibrate the fiscal stance on the evolution of the pandemic and economic conditions, providing additional, targeted support where needed in case of renewed, COVID-related disruptions. Fiscal policy should also focus on promoting long-term growth while addressing emerging structural issues. As uncertainty related to the pandemic recedes, the authorities should update their fiscal targets, which were suspended during the pandemic, to provide an anchor for fiscal policy and manage long-term spending pressures.

Monetary policy should remain data dependent, and continued, swift policy normalization will be appropriate under baseline conditions . Given New Zealand’s cyclical position, continued, significant increases in the OCR in the near term would signal the RBNZ’s commitment to addressing inflation. In the event downside risks to growth materialize, more gradual tightening, coupled with a pause in reducing the RBNZ’s balance sheet, can be considered, but elevated inflation suggests that room for additional monetary stimulus is limited.

Raising bank capital requirements and enlarging the MPM toolkit will help the system weather future shocks. Higher bank capital requirements will help insulate the banking system from future shocks, though the impact on lending rates should be monitored. The DTB is a step forward in adopting international good practices to strengthen financial regulation and supervision and enhance depositor protection, and opportunities for further strengthening the proposed law should be seized, including by addressing remaining FSAP recommendations.

Continued focus is needed on addressing housing imbalances. The macroprudential measures implemented last year should be maintained, and work to expand the macroprudential toolkit is appropriate. Increasing the stock of social housing remains important in the near term as a durable solution to housing affordability is achieved over time by addressing supply constraints.

The external position is broadly consistent with economic fundamentals and desired policy settings. The assessment is subject to large uncertainty and assumes that the extraordinary impact of COVID-19 on the tourism and transportation sectors is temporary.

Stronger efforts are needed to meet GHG emissions goals. The recent rise in carbon prices is welcome, and the forthcoming Emissions Reduction Plan is an opportunity to further strengthen the price-based mechanism and lay out complementary policies. The planned introduction of prices on agricultural emissions will be important to include the largest emissions source in New Zealand’s climate mitigation efforts, incentivizing the adoption of new technologies and methods to lower emissions. Proceeds of higher carbon prices should be used to invest in emissions reduction and to compensate those adversely affected by carbon price increases, particularly vulnerable groups.

Structural policies should promote durable and inclusive growth . The authorities should promote innovation and digitalization, and tax reforms would support long-term growth. Infrastructure spending should aim at reducing the infrastructure gap and supporting the transition to a net zero carbon growth path. Unemployment insurance should be calibrated carefully to address trade-offs between insurance and disincentives, and minimum wage increases should be aligned with underlying labor productivity growth.


[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]The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

Table 1. Main Economic Indicators, 2017-2027

(Annual percent change, unless otherwise indicated)

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

Projections

NATIONAL ACCOUNTS

Real GDP (production)

3.5

3.4

2.9

-2.1

5.6

2.7

2.6

1.9

1.7

2.4

2.3

Real GDP (expenditure)

4.0

4.3

3.3

-0.9

5.0

1.9

2.6

1.9

1.6

2.4

2.2

Domestic demand

5.2

5.2

3.2

-1.9

9.6

3.8

1.3

2.4

2.3

2.0

2.1

Private consumption

5.5

4.6

3.2

-1.2

6.6

2.6

2.6

3.7

2.7

2.4

2.4

Public consumption

3.5

3.3

5.1

6.8

10.4

7.9

-1.4

-0.2

1.3

0.4

0.2

Investment

5.5

8.0

2.4

-10.1

16.6

0.7

0.5

1.5

2.1

2.4

2.9

Public

7.4

2.2

2.0

-6.8

6.9

-0.9

0.6

3.0

4.4

4.7

4.8

Private

3.8

8.0

5.1

-7.2

10.6

5.7

0.5

1.1

1.5

1.7

2.3

Private business

6.5

13.0

5.0

-8.9

10.5

6.6

0.1

1.3

1.3

1.5

3.1

Dwelling

-1.1

-1.6

5.4

-3.3

11.0

4.1

1.2

0.7

1.8

2.2

0.7

Inventories (contribution to growth, percent)

0.2

0.3

-0.5

-0.8

1.6

-1.0

0.0

0.0

0.0

0.0

0.0

Net exports (contribution to growth, percent)

-1.6

-1.2

0.0

1.7

-5.1

-2.3

1.1

-0.7

-0.9

0.2

-0.1

Real gross domestic income

5.4

3.7

3.3

-0.6

4.2

4.4

2.4

3.9

2.4

1.9

2.0

Investment (percent of GDP)

23.3

24.3

24.1

21.7

24.5

24.4

24.0

23.4

23.4

23.3

23.2

Public

5.5

5.4

5.3

5.0

5.1

5.0

4.9

4.9

5.0

5.0

5.1

Private

17.9

18.9

18.8

16.7

19.5

19.4

19.1

18.6

18.4

18.2

18.1

Savings (gross, percent of GDP)

20.5

20.3

21.2

20.8

18.7

17.9

18.6

19.2

19.2

19.1

18.9

Public

1.3

1.3

-2.5

-4.0

-4.9

-4.9

-1.8

-1.2

-0.4

0.1

0.1

Private

19.2

19.0

23.6

24.9

23.7

22.8

20.4

20.4

19.6

19.0

18.8

Potential output

3.0

3.0

3.1

1.6

1.5

1.9

2.5

2.5

2.5

2.5

2.5

Output gap (percent of potential)

0.5

0.9

0.7

-3.0

0.9

1.7

1.9

1.3

0.4

0.3

0.0

LABOR MARKET

Employment

4.2

2.9

1.3

1.3

2.4

1.7

1.0

1.4

1.2

1.2

1.3

Unemployment (percent of labor force, ann. average)

4.7

4.3

4.2

4.6

3.8

3.6

3.9

3.9

4.1

4.3

4.4

Wages (nominal percent change)

2.6

3.0

3.4

3.8

3.8

4.9

4.6

3.7

3.5

3.7

3.3

PRICES

Terms of trade index (goods and services, % change)

5.0

-1.4

0.1

1.2

-1.2

8.3

-2.0

5.2

1.2

-2.1

-1.6

Terms of trade index (goods, % change)

7.3

-1.8

0.4

2.3

1.7

9.1

-3.3

2.5

-1.4

-4.5

-5.1

Consumer prices (avg, % change)

1.9

1.6

1.6

1.7

3.9

5.9

3.5

2.4

2.2

2.1

2.0

GDP deflator (avg, % change)

3.3

1.3

2.4

2.2

2.9

5.7

4.1

3.4

3.0

2.8

2.5

MACRO-FINANCIAL

Official cash rate (policy rate, percent, avg)

1.8

1.8

1.4

0.4

0.4

1.7

3.3

3.5

3.0

2.5

2.5

Credit to the private sector (percent change)

4.9

5.4

5.6

3.9

6.1

2.7

1.1

4.0

4.5

4.2

4.1

Interest payments (percent of disposable income)

7.7

7.5

7.1

6.2

6.0

8.2

8.3

8.3

8.1

7.8

7.7

Household savings (percent of disposable income)

3.3

3.2

3.4

3.6

3.6

3.2

2.7

2.5

2.4

2.3

2.3

Household debt (percent of disposable income)

159

158

159

164

169

160

152

151

150

148

147

GENERAL GOVERNMENT (percent of GDP) 1/

Revenue

37.4

36.8

37.8

36.1

37.7

37.1

37.3

37.4

37.3

37.4

37.4

Expenditure

36.1

35.5

36.6

42.2

39.6

44.9

39.5

38.8

38.2

37.4

37.3

Net lending/borrowing

1.3

1.3

1.2

-6.1

-1.9

-7.7

-2.2

-1.4

-0.9

0.0

0.1

Operating balance

2.9

3.2

3.2

-4.3

-0.3

-5.1

0.6

1.7

1.9

2.3

2.4

Cyclically adjusted balance 2/

1.3

1.0

0.9

-4.8

-2.4

-7.5

-2.2

-1.8

-0.2

0.1

0.6

Gross debt

32.5

30.0

26.2

38.4

45.9

51.5

51.3

51.9

49.3

47.7

45.0

Net debt

6.0

5.2

4.3

9.6

10.4

19.2

20.8

22.1

20.3

19.3

16.8

Net worth

88.2

91.4

93.2

83.6

92.0

80.5

77.3

77.0

76.8

78.4

80.3

BALANCE OF PAYMENTS

Current account (percent of GDP)

-2.8

-4.0

-2.9

-0.8

-5.8

-6.5

-5.3

-4.2

-4.2

-4.2

-4.3

Export volume

2.7

3.2

2.4

-12.9

-2.5

7.3

9.1

6.4

6.0

5.7

5.7

Import volume

7.3

6.4

2.1

-15.9

15.4

12.6

3.1

6.8

6.8

3.7

4.4

Net international investment position (percent of GDP)

-52.3

-56.2

-53.6

-55.6

-46.1

-49.2

-51.4

-53.0

-54.9

-56.3

-58.1

Gross official reserves (bn US$)

20.3

17.6

17.0

13.0

MEMORANDUM ITEMS

Nominal GDP (bn NZ$)

286

303

320

324

350

377

403

425

444

468

490

Percent change

7.4

5.7

5.8

1.3

8.0

7.8

6.8

5.4

4.7

5.3

4.8

Nominal GDP per capita (US$)

42,271

42,767

42,321

41,418

48,413

49,835

52,957

54,996

56,324

58,227

60,042

Real gross national disposable income per capita (NZ$)

51,235

52,213

53,601

52,710

54,387

55,769

56,572

57,879

58,463

58,813

59,135

Percent change

2.3

1.9

2.7

-1.7

3.2

2.5

1.4

2.3

1.0

0.6

0.5

Population (million)

4.8

4.9

5.0

5.1

5.1

5.2

5.2

5.3

5.4

5.4

5.5

US$/NZ$ (average level)

0.711

0.693

0.659

0.650

Nominal effective exchange rate

111.1

106.8

105.2

103.8

Real effective exchange rate

107.4

102.9

101.4

100.6

Sources: Authorities’ data and IMF staff estimates and projections.

1/ Fiscal year.

2/ In percent of potential GDP.

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