OECD Economic Outlook, Volume 2018 Issue 1

New Zealand

Solid economic growth is projected to continue at 3% in 2018 and 2019. Private consumption will slow with lower net immigration and moderation of wealth gains from house price increases. Residential investment will be supported by demand in Auckland and government funding through the KiwiBuild programme. Government infrastructure spending will also rise, while business investment should recover from weakness in late 2017 as capacity remains tight.

Projected increases in interest rates and government spending will improve the macroeconomic policy balance. Both should also serve to reduce housing market pressures, but resolution of infrastructure and planning constraints in Auckland is critical to easing affordability challenges, boosting weak productivity and avoiding a further house price breakout.

Strong growth is tightening capacity constraints

Economic growth was solid in 2017, underpinned by consumption and international tourism. Private consumption has been supported by population growth, income gains from record terms of trade, wealth effects from house price increases, a strong labour market and accommodative monetary policy. Net immigration, which has been the major driver of population growth, has begun to moderate, with a small fall in arrivals (in part reflecting tighter eligibility for work visas) and an increase in departures as temporary immigrants return home. House price appreciation has also slowed due to higher mortgage rates, tightening lending standards and affordability pressures. Exports were temporarily weak in late 2017 and early 2018 following a dry period that affected agricultural and related exports.

New Zealand

1. Moving four-quarter total.

Source: ANZ Bank; Statistics New Zealand; and OECD Economic Outlook 103 database.

Statlink

Business investment intentions have recovered somewhat following resolution of uncertainty around the general election result. Survey measures of capacity utilisation are high. The unemployment rate is at a nine‑year low, and participation has increased, but labour market tightness has not translated into strong wage growth. In part this is due to migratory flows of workers into sectors facing labour shortages. The almost 5% increase in the hourly minimum wage from 1 April 2018 will support income growth but directly affects only around 3% of the labour force.

New Zealand. Demand, output and prices

Statlink

Fiscal and monetary policy settings are supporting growth

Fiscal policy is projected to shift to an expansionary stance. Spending increases result from the provision of free tuition for the first year of tertiary education, a substantial pick‑up in infrastructure and health spending and increased transfer payments to students and families. Additional spending does not threaten fiscal sustainability, with government debt still declining as a share of GDP. The Kiwibuild programme will provide around NZD 0.5 billion per year (0.2% of GDP) for constructing affordable homes, which is expected to boost housing investment from mid‑2019. A proposed ban on foreign housing purchases could constrain housing investment by increasing compliance costs and uncertainty for foreign developers who would be required to divest after completion. High barriers to foreign direct investment already contribute to low labour productivity.

Withdrawal of some monetary policy stimulus is projected in 2019 in order to slow inflation, which will be underpinned by capacity constraints and increasing import prices from New Zealand’s main trading partners. These interest rate increases are expected to stabilise inflation close to the 2% midpoint of the Reserve Bank’s target range.

Growth is projected to remain solid

Growth is set to continue above the OECD average, at close to potential rates, as activity shifts away from consumption toward investment. However, if net immigration does not fall to the extent assumed consumption gains will be larger. A sharp housing correction is the biggest downside risk, as household debt has risen to high levels relative to income, and most mortgagees have interest rates that are floating or will be repriced within two years. Conversely, short‑term growth could be higher if housing shortages in Auckland trigger further price rises and associated wealth effects.