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New Zealand Economic growth is projected to remain around 2½ per cent in 2020-21. Exports are set to decelerate and consumption will lose momentum, reflecting diminishing net migration inflows and lower housing wealth gains. On the other hand, business investment is expected to strengthen in response to rising labour costs and a falling cost of capital, thereby easing tight capacity constraints. Fiscal policy is currently expansionary, turning close to neutral in 2020 and contractionary in 2021. The central bank has recently cut the policy rate by 50 basis points to 1% and is expected to make two further 25-basis-point cuts by mid-2020, which are needed to increase inflation towards the mid-point of the target band. It is also planning to raise bank capital requirements substantially, which would reduce risks but increase credit costs. Economic growth is stable Economic growth has eased to around 2½ per cent. Household consumption has moderated on the back of slower net migration and smaller housing wealth gains. Despite historically high capacity utilisation and the low cost of capital, business investment remains subdued, as business confidence has been depressed by heightened uncertainty over global economic conditions, concerns about government policy, the costs and availability of labour and tight profit margins. However, residential investment has strengthened considerably, helping to ease housing shortages. Prices for New Zealand’s commodity exports remain high by historical comparison, supporting income and economic activity. The labour market is tight, with the unemployment rate below the estimated structural rate and wage growth edging up, partly reflecting scheduled increases in the minimum wage rate, which is set to rise to NZD 20 per hour by 2021, one of the highest levels relative to the median wage in the OECD. Inflation remains slightly below the mid-point of the Reserve Bank’s target band.
New Zealand Net migration has peaked and consumption is set to slow Y-o-y % changes 7
← Real private consumption
Thousands 70
Net migration¹ →
6
60
90
10
88
5
86
0
84
10
-5
82
0
-10
40
3
30
2
20
1
2019
2021
94
15
4
2017
Capacity utilisation →
25
92
50
2015
% 96
← Real business investment
20
5
0
Business investment remains subdued Y-o-y % changes 30
2011
2013
2015
2017
2019
2021
80
1. RBNZ projections. Net migration data refer to working-age (15 and over) migrants. Source: Reserve Bank of New Zealand (2019), Monetary Policy Statement, August; New Zealand Institute of Economic Research (2019), Capacity Utilisation, Business Opinion; and OECD Economic Outlook 106 database. StatLink 2 https://doi.org/10.1787/888934045791
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New Zealand: Demand, output and prices 2016
2017
Current prices NZD billion
New Zealand GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1
265.9 153.0 48.1 61.1 262.2 0.8 263.1 71.1 68.2 2.9
Memorandum items GDP deflator Consumer price index Core inflation index2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) Current account balance (% of GDP)
_ _ _ _ _ _ _ _
2018
2019
2020
2021
Percentage changes, volume (2009/2010 prices)
2.7 4.7 2.8 3.5 4.1 -0.1 3.9 2.3 6.9 -1.2
2.8 3.3 2.2 3.6 3.2 0.5 3.7 2.6 5.8 -0.8
2.7 2.7 2.9 3.0 2.8 -0.7 2.1 2.8 1.0 0.5
2.5 2.4 3.5 3.0 2.7 0.3 3.0 1.6 3.3 -0.5
2.4 2.4 2.2 3.5 2.6 0.0 2.6 2.3 3.1 -0.2
3.5 1.9 1.4 4.7 -1.4 1.1 36.0 -2.7
1.1 1.6 1.2 4.3 -1.0 0.9 34.5 -3.9
2.1 1.5 1.8 4.1 -0.7 0.4 32.7 -3.2
2.2 1.9 1.9 4.2 -0.6 0.3 32.5 -3.3
2.0 1.9 1.9 4.3 -0.4 0.8 31.8 -3.4
1. Contributions to changes in real GDP, actual amount in the first column. 2. Consumer price index excluding food and energy. Source: OECD Economic Outlook 106 database.
StatLink 2 https://doi.org/10.1787/888934046722
Monetary policy is expansionary but fiscal policy will become contractionary Fiscal policy will be slightly expansionary in 2020, reflecting the lagged effects of the estimated decline (by ½ per cent of GDP) in the underlying general government primary surplus in 2019, and is projected to be contractionary in 2021, when the underlying primary surplus rises by ½ per cent of GDP. Some planned spending increases in FY 2019-20 (fiscal years end on 30 June) may be delayed due to capacity constraints, notably in infrastructure, pushing back the stimulus. Fiscal tightening in 2021 will result from higher tax revenue. Monetary policy is set to become more expansionary, with two more 25-basis-point rate cuts expected by mid-2020, from the current, historically low, 1% rate. However, the planned increase in banks’ Tier 1 capital requirements risks tightening access to credit. Should further stimulus be needed, New Zealand is well placed to deliver it through fiscal policy as the general government budget is in a surplus and debt is low. The well-being approach to budgeting, first adopted in the FY 2019-20 budget, has the potential to enhance the effectiveness of additional spending or tax cuts in raising well-being. Well-being and aggregate demand could be boosted by reforms to reduce barriers to new housing supply, notably those arising from unnecessarily restrictive and complex land-use regulation, and financial disincentives for local governments to supply housing-related infrastructure.
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Economic growth will remain steady GDP growth is projected to remain around 2½ per cent in 2020-21. While net migration inflows and exports are set to slow and fiscal policy to turn mildly contractionary, business investment should expand in response to rising wage costs and further declines in the cost of capital. The unemployment rate is projected to remain around the current low level. Rising labour costs will gradually push up inflation. A key downside risk is that global economic conditions deteriorate more than expected, resulting in lower growth in exports and business investment. In such a scenario, prices for New Zealand’s commodity exports could also decline, pushing down incomes and output growth. An upside risk is that net inward migration falls less than assumed, supporting higher growth.
OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019