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New Zealand Economic and Financial Overview 2016

Recent Economic Performance and Outlook

The New Zealand economy has steadily recovered from the global financial crisis (GFC) despite further disruptions such as the Canterbury earthquakes and occasional periods of drought.

Response to GFC

The New Zealand economy experienced a recession in 2008 and 2009 owing primarily to the intensification of the GFC in 2008. Similar to the experience in many advanced economies, business and consumer confidence plummeted as the cost of credit increased and house prices fell modestly. Local banks' access to funding in overseas markets was temporarily curtailed as uncertainty dominated the global financial and economic environment. Real GDP contracted 2.8% overall between March 2008 and June 2009.

The Reserve Bank of New Zealand (RBNZ) responded to the crisis by lowering the Official Cash Rate (OCR) from 8.25% in June 2008 to a low of 2.5% at the end of April 2009 and introducing facilities to ensure adequate liquidity for the banking sector.

The Government introduced retail and wholesale bank guarantees aimed at restoring confidence in the banking sector and providing banks with improved access to wholesale funding. (Both schemes have since been discontinued.)

The Labour-led Government proceeded with income tax cuts in October 2008 and the National-led Government, which came to power in November 2008, introduced further tax reductions effective from 1 April 2009.

Other short-term measures taken by the Government in late 2008 included infrastructure projects and a temporary relief package to assist small and medium-sized businesses.

Canterbury Earthquakes

On 22 February 2011, the Canterbury region on the eastern side of the South Island experienced a devastating 6.3-magnitude earthquake. A total of 185 people were killed; the second deadliest natural disaster in New Zealand history. This followed a 7.1-magnitude earthquake on 4 September 2010, in which there had been no direct casualties. The earthquakes (including subsequent aftershocks) caused wide-spread damage to buildings and infrastructure, in particular to the Central Business District (CBD) and eastern parts of Christchurch, New Zealand's second most populous city.

The New Zealand Treasury estimated the total cost of the rebuild at around $40 billion (about 20% of annual nominal GDP), much of which is covered by private insurance (reinsured through overseas insurance companies) and the government-owned Earthquake Commission (EQC).

Economic Recovery and Outlook

The New Zealand economy has made a solid recovery since the 2008/09 recession, which was shallow compared to other advanced economies. Annual growth has averaged 2.1% since the March quarter of 2010 despite a period of softer growth in 2012, and was strong by historical standards in 2014. Growth in the June and September quarters of 2015 was 0.3% and 0.9% respectively, bringing annual average growth to 2.9% in the year ended September. Growth over the past year has been driven by the construction, services and agricultural sectors.

Despite the significant disruption caused by the earthquakes, the impact on economic activity was less than expected. Many businesses were able to relocate out of the badly-damaged CBD and continue trading, and primary and manufacturing production in the region was not significantly affected.

The Canterbury rebuild is expected to be a positive driver of growth over the next several years through commercial and infrastructure investment. It appears that the residential rebuild has already peaked and so it will not further contribute to growth in activity, but will remain at a high level. Earthquake-related residential construction is expected to have peaked around the end of 2015 but the level of overall residential investment in the economy is expected to continue to expand, supported by housing construction in Auckland.

The global economy rebounded from the GFC in 2010 but then slowed significantly as public stimulus measures faded in China, the earthquake in Japan caused disruption in 2011 and European sovereign debt issues emerged. However, New Zealand's increasing exposure to the faster growing areas of the world, in particular Australia and emerging Asia including China, resulted in exports holding up better than otherwise expected. New Zealand's trading partner growth was 3.7% in 2014 and Half Year Update forecasts are for this to fall slightly to 3.5% in 2015.

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