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Economic Outlook

The economy is recovering from recession...

Figure 1.1 - Real production GDP
Figure 1.1 - Real production GDP.
Source:  Sources: Hall and McDermott (2009), Statistics
New Zealand, the Treasury

The New Zealand economy contracted throughout 2008 and early 2009 (Figure 1.1). The initial triggers of recession in early 2008 were domestic factors, including drought and tight monetary policy to combat growing inflation pressures at the time. This domestic-led recession was deepened by the global financial crisis, which escalated in mid-September 2008.

The impact of the global downturn on New Zealand, while significant, was smaller than for most developed nations. In the OECD, only Australia and Poland had smaller falls in real output from when the crisis began. New Zealand’s performance was supported by a sound financial system, growth in key trading partners China and Australia, strong commodity exports, falling emigration and monetary and fiscal stimulus. These factors also helped pull New Zealand out of recession in the June 2009 quarter. Although the beginning of the recovery in mid-2009 was subdued, it gathered strength in the December quarter with growth of 0.8%.

...but significant imbalances built up before the recession

Significant imbalances built up in the economy during the expansion in the 2000s. These imbalances, although closely related, can be broadly categorised as follows:

  • Strong domestic demand, including government expenditure, gradually increased pressure on available resources and resulted in persistently high inflation. Monetary policy tightened during this period, with higher interest rates encouraging the New Zealand dollar to appreciate.
  • Domestic demand was partially funded from high rates of borrowing, with household and agriculture debt rising sharply over much of the 2000s driven partly by increasing house and farm prices. However, house and farm prices rose well above fundamental determinants, such as income and farm returns.
  • The years leading up to recession featured a divergence of growth between sectors. The tradable sector, which includes primary, manufacturing and tourism industries, did not grow from early 2004 to the peak of the last economic upturn in late 2007. In contrast, non-tradable industries such as construction, retail and government administration grew strongly.
  • Relatively strong investment and a fall in national saving, led by households, contributed to a rise in the current account deficit to around 8% of GDP on average from 2004 to 2008, before it fell during the recession. The savings of foreigners were increasingly used to finance these deficits, which raised the net international liability position to over 90% of GDP by early 2009.

These imbalances were facilitated by easier global credit and low risk aversion, and were also apparent in other developed nations. Although New Zealand came through the recent global downturn relatively well, New Zealand's past and projected current account deficits, domestic indebtedness and its net international liability position are large relative to most developed nations, making the economy vulnerable to some types of shocks. With a gradual economic recovery expected to continue, the current account deficit is forecast to widen again from 2.6% of GDP to over 7% of GDP. Such deficits would mean a rise in the net international liability position to 100% of GDP by mid-2014 (Figure 1.2). However, there are a number of factors that support New Zealand's position. These include sound macroeconomic settings (eg, a flexible exchange rate and independent monetary policy), external debt that is largely denominated in local currency or hedged, relatively low public debt and a robust banking system.

Figure 1.2 - Current account balance and net international investment position
Figure 1.2 - Current account balance and net international investment position.
Source:  Statistics New Zealand, the Treasury
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