Here is the official summary of the IMF’s press release on its review of the New Zealand economy.

IMF Executive Board Concludes 2022 Article IV Consultation with New Zealand


Washington, DC – May 13, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with New Zealand on May 13, 2022 and approved the staff review without a meeting on the basis of no objection. New Zealand has achieved a strong cyclical position thanks to successful management of the pandemic and strong political support. Strong public health policies and border controls helped contain waves of COVID-19 in 2020 and 2021, and high vaccination rates enabled a shift to living with COVID during the current wave of COVID-19. Omicron. The economy rebounded strongly in 2021, with growth of 5.6%, helped by strong fiscal support and accommodative monetary policy. As a result, the labor market has tightened considerably, with historically low unemployment and growing wage pressures in the face of labor shortages, exacerbated by border closures. Inflation rose significantly above the Reserve Bank of New Zealand (RBNZ) target range, due to rising food and energy costs, supply chain disruptions supply, soaring property prices and rising wages. Record mortgage rates, easy availability of credit, and COVID-related pent-up demand in the face of inelastic supply, have driven up house prices dramatically, rapidly reducing housing affordability.

Economic growth is expected to slow to around 2.7% in 2022, reflecting the withdrawal of COVID19-related policy support, the global economic slowdown and temporary setbacks from the ongoing COVID wave. The housing market has turned and house prices are expected to continue to slow as interest rates rise, credit conditions tighten and supply improves. The unemployment rate is likely to remain very low given labor shortages, with a further pick-up in wage growth expected. High commodity prices due to war in Ukraine, ongoing supply chain disruptions and tight New Zealand labor market will likely help keep inflation above the RBNZ target range in 2022-23.

Downside risks dominate in the short to medium term. Near-term risks to the outlook include further outbreaks of COVID-19 variants and heightened geopolitical tensions, which could hurt economic activity, worsen global supply chain disruptions and push up the inflation. Slower-than-expected growth in China is a risk for New Zealand given strong trade ties. The housing market is also a risk given the vulnerability of borrowers to rising mortgage rates, high household indebtedness and banks’ exposure to housing.

Board assessment

In concluding the 2022 Article IV consultation with New Zealand, Directors approved the staff assessment, as follows:

New Zealand has handled the transition to life with COVID well. Strong health and economic policies supported a rapid recovery from lockdowns in 2021. After a slow start, rapid progress in the vaccination campaign paved the way for a new normal. The expected reopening of borders will provide an additional economic boost to the tourism and education sectors. Nonetheless, economic growth is expected to slow this year, reflecting policy tightening, global fallout and the ongoing Omicron wave. Amid war-related commodity price pressures in Ukraine, continued supply chain disruptions and a tight labor market, inflation is expected to remain elevated and remain well above the RBNZ target range this year. Overall, the outlook remains highly uncertain, depending on the trajectory of the pandemic and geopolitical developments.

The path to macroeconomic policy normalization must be adapted to changing economic conditions. With output above potential and inflation stronger than expected, the authorities are rightly withdrawing their fiscal and monetary support. Based on baseline expectations for growth and inflation, the pace of expected withdrawal of policy support is adequate. That said, the pace should be adjusted with agility in case upside or downside risks materialize.

Fiscal policy should remain agile amid continued uncertainty. While the planned tightening of fiscal policy is appropriate, the authorities should calibrate the fiscal stance based on the evolution of the pandemic and economic conditions, providing additional targeted support if needed in the event of further COVID-related disruptions. . Fiscal policy should also focus on promoting long-term growth while addressing emerging structural issues. As pandemic-related uncertainty subsides, the authorities should update their fiscal targets, which were suspended during the pandemic, to provide an anchor for fiscal policy and manage pressures on long-term expenses.

Monetary policy is expected to remain data driven, and continued rapid normalization of policy will be appropriate under baseline conditions. Given New Zealand’s cyclical stance, large and continued increases in short-term OCR would signal the RBNZ’s commitment to fighting inflation. Should downside risks to growth materialize, more gradual tightening, coupled with a pause in RBNZ balance sheet reduction, may be on the cards, but elevated inflation suggests that the additional leeway for policy measures monetary stimulus is limited.

Increasing bank capital requirements and expanding the MPM toolkit will help the system weather future shocks. Raising bank capital requirements will help cushion the banking system from future shocks, although the impact on lending rates needs to be monitored. The DTB is a step forward in adopting international best practices to strengthen financial regulation and supervision and improve depositor protection, and opportunities to further strengthen the proposed law should be seized, including by addressing the remaining recommendations of the PESF.

Continue to focus on addressing housing imbalances. The macroprudential measures put in place last year should be maintained and the work to expand the macroprudential toolbox is appropriate. Increasing the social housing stock remains 3 important in the short term, as a sustainable solution to housing affordability is achieved over time by addressing supply constraints.

The external position is broadly in line with economic fundamentals and desired policies. The assessment is subject to great uncertainty and assumes that the extraordinary impact of COVID-19 on the tourism and transport sectors is temporary.

Greater efforts are needed to meet GHG emissions targets. The recent rise in carbon prices is welcome and the next emission reduction plan is an opportunity to further strengthen the price-based mechanism and define complementary policies. The planned introduction of agricultural emissions pricing will be important for including the largest source of emissions in New Zealand’s climate mitigation efforts, incentivizing the adoption of new technologies and methods to reduce emissions. Proceeds from rising carbon prices should be used to invest in reducing emissions and to compensate those adversely affected by carbon price increases, especially vulnerable groups.

Structural policies must promote sustainable and inclusive growth. Authorities should promote innovation and digitalization, and tax reforms would support long-term growth. Infrastructure spending should aim to reduce the infrastructure gap and support the transition to a net zero carbon growth trajectory. Unemployment insurance must be carefully calibrated to account for trade-offs between insurance and disincentives, and minimum wage increases must be aligned with underlying labor productivity growth.

The full report is here or more directly here.