IMF Executive Board Concludes 2021 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.

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.