China, housing threats to economy

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Last updated 05:00 11/06/2014

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The biggest threats to New Zealand's economy are rapid house-price inflation and a sharp downturn in China, the International Monetary Fund (IMF) says.

In a broadly positive report the IMF said growth was becoming "increasingly embedded and broad-based" thanks to the Christchurch earthquake rebuild, the housing shortage, strong commodity prices and a big increase in net migration.

But it warns that a housing bubble - or as it puts it "expectations-driven, self-reinforcing demand dynamics and price overshooting" - could take hold.

The Government's steps to ease supply bottlenecks and the Reserve Bank's moves to tighten mortgage lending and increase interest rates should help ease price pressures, it said.

"But a sudden price correction - possibly triggered by a shock to household incomes or borrowing costs - could reduce consumer confidence, impact [on] overall economic activity, and hurt banks' balance sheets."

The key external risk to the outlook remained a sharp slowdown in growth in China, which would affect New Zealand directly through the terms of trade and indirectly through its impact on Australia, a key trading partner.

Longer term, the country's external liabilities were high by international standards and national savings should increase.

Cutting the size of the Budget deficit was helping lift national savings.

But the exchange rate was likely to remain high, so non-agricultural exporters would need to increase efficiency to remain competitive.

The country's banks were well-capitalised but faced long-standing structural issues.

Macro-economic policies were moving in the right direction and the Government's plan to return to surplus was on track, it said.

"With public debt low and interest rates [in positive territory], 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 IMF forecast growth to peak at 3.5 per cent next year and stay above 2.5 per cent for the next few years.

In the May Budget, Treasury forecast growth of 3.9 per cent in the year to June 2015 falling to 2.6 per cent, 2.1 per cent, and 2.2 per cent in the following years.

Finance Minister Bill English said the IMF report was the latest in a series of encouraging views on the economy.

"The IMF is expecting New Zealand's current-account deficit to increase to around 6 per cent of GDP by 2016 - still well below the levels seen in the mid-2000s," English said.

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"Although this longstanding imbalance remains a vulnerability, the latest figures are encouraging with Statistics New Zealand showing the current account deficit at 3.4 per cent of GDP."

- Stuff

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