IMF Executive Board Concludes 2019 Article IV Consultation with New Zealand
Some key drivers of
Economic growth picked up in early 2019 after slowing in the second half of 2018. The pickup mostly reflected a rebound in private business investment growth. Residential investment also strengthened, notwithstanding cooling housing markets. The
The current account deficit widened to 3.8 percent of GDP in 2018, reflecting a decline in the terms of trade. The external position was weaker than implied by medium-term fundamentals and policy settings, while the
Bank lending continued to slow across all sectors, growing now broadly in line with nominal GDP. Banks strengthened their lending standards, although the recent modest easing in the RBNZ's loan-to-value ratio (LVR) restrictions in
Housing markets cooled but affordability constraints remain. The cooling reflects a tightening in banks' mortgage lending standards, the tightening of LVR restrictions by the RBNZ during 2016-17, and declining affordability. The government is refocusing elements of its multi-pronged approach to improve housing affordability.
Within the greater focus on wellbeing under the Living Standards Framework, the government has a roster of policies to foster productivity growth. These include introducing an R&D tax credit regime, continuing to increase education spending, creating a
Executive Board Assessment
In concluding the 2019 Article IV consultation with
Economic growth is expected to remain close to that of potential output, but risks to the growth outlook are tilted to the downside. After increasing in early 2019, growth is expected to strengthen further in 2019-20 on the back of monetary and fiscal policy support, eventually leading to a small positive output gap and a gradual acceleration of inflation towards the 2 percent midpoint of the RBNZ's target range. Downside risks to the economic outlook in
The recent monetary policy easing fits the subdued inflation conditions and near-term risks to the outlook. Economic growth is only expected to remain close to potential on the back of a timely increase in macroeconomic policy support. Such support remains critical until underlying domestic demand and inflation have strengthened more durably. With downside risks to growth, employment, and inflation, insufficient monetary accommodation still is a bigger concern than the upside risk to inflation if the monetary policy stance were to turn out to be too expansionary.
Fiscal policy strikes an adequate balance between near-term demand support and maintaining prudent debt levels. The FY2019/20 budget supports new wellbeing initiatives and should provide modest near-term stimulus to aggregate demand. While
The
The scope for easing macroprudential restrictions is limited, given still-high macrofinancial vulnerabilities. The combined impact of the LVR settings and tighter bank lending standards has led to a decline in riskier mortgages in bank assets. While house price inflation and credit growth have moderated, any further easing of LVR restrictions should consider the possible impact on banks' prudential lending standards, as well as the risks to financial stability from high household debt.
The proposed higher capital conservation buffers would provide for a welcome increase in banking system resilience. The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the banking system. Starting from a relatively strong position, there is scope for some flexibility when setting some parameters in the revised capital framework, including the length of the phase-in period and types of capital within the buffers. The new framework should also differentiate more between large and small banks. A stronger bank supervision regime would still be needed, to complement the higher capital requirements.
The main reforms envisaged in the ongoing Phase Two of the Review of the RBNZ Act should increase financial system resilience. The upgrades to the regulatory and supervisory framework would advance key areas of reform identified in the
Mitigating supply constraints is critical for housing affordability and requires further progress in the government's comprehensive housing policy agenda. The reform of the institutional structure, including the establishment of the
Addressing long-standing low productivity growth continues to be a central concern. In this respect, some important first steps have been taken, including the introduction of a new R&D tax credit regime; the creation of the
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