Overview

KEY ISSUES Outlook and risks The economic expansion is becoming increasingly embedded and broad-based, driven by supportive financial conditions, historically high commodity prices, resurgent construction activity related to the Canterbury post-earthquake rebuild and general housing shortages, and a substantial increase in net immigration. The main external threat to the outlook continues to be a sharp slowdown in China. Domestically, rapid house price inflation remains a concern. Medium- and long-term challenges. New Zealand’s net external liability position, although relatively stable, is high by international standards, making it desirable to raise national savings. The government’s ongoing fiscal deficit reduction contributes to this aim. As global liquidity could remain ample for some time and keep the exchange rate elevated, New Zealand’s non-agricultural tradable sector will need to continue to adapt by further increasing efficiency to remain competitive. The banks, although well- capitalized, face longstanding structural issues that will remain sources of financial sector risk over the medium term. Policy assessment. Macroeconomic policies are moving in the right direction. With excess capacity largely exhausted the RBNZ has begun tightening monetary policy. The government’s plan to return the budget to surplus is on track. With public debt low and interest rates above the zero bound, the authorities have monetary and fiscal policy space to respond to shocks, and the free-floating New Zealand dollar provides an additional cushion against terms of trade and other external shocks. The well targeted macro-prudential policy framework should allow the RBNZ to take additional measures if needed to guard against the financial sector risks that would arise from an unsustainable acceleration in house price inflation.

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