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New Zealand.

New Zealand is finally emerging from its five-quarter long recession, the beneficiary of strong domestic and global policy stimulus. But the recovery could be hampered by the overhang of high private sector indebtedness, ongoing credit contraction, the currency's recent strength and rising unemployment.

Given weak and fragile private demand, it is appropriate that monetary and fiscal policies remain expansionary for the time being. However, if the recovery takes hold as projected, stimulus should start to be withdrawn by mid-2010 in order to reinforce balance-sheet restructuring and, in conjunction with structural reforms, to steer activity toward tradeables production rather than housing investment as the main generator of income and wealth.

The recession has ended

After contracting for five consecutive quarters, the economy expanded in the second quarter of 2009. A large negative inventory correction was more than offset by a strong positive contribution from net exports. Dairy exports surged, as huge stockpiles were sold off in response to a long-awaited price recovery. Increases in household consumption and public investment were counterbalanced by declines in private investment and public consumption. Recent indicators, notably improving business production expectations and retail sales, suggest that the third quarter is on track to register modest positive growth. Some favourable growth dynamics have established themselves in recent months: an upturn in the housing market (as manifested in rising sales and prices), where demand has been boosted by record-low interest rates plus unusually strong net immigration during a recession; double-digit gains in consumer confidence, in turn reflecting the housing-market improvement and fiscal stimulus; and trading-partner growth and accompanying commodity price increases, helping to shore up farm incomes.


Yet, headwinds persist

Unemployment is rising markedly and, as a lagging indicator, will continue to do so. This may hold down incomes and, along with the need to unwind the burden of household debt, raise the propensity to save. The exchange rate has appreciated, reflecting recovering commodity prices and risk appetites, in turn impairing competitiveness and cutting into net export volumes. Credit growth continues to decline, boding poorly for private demand. Indeed, unlike in previous recoveries, businesses may be loathe to hire and invest in a major way any time soon.

Policy support to demand is still required

Notwithstanding the earlier-than-expected onset of recovery, the Reserve Bank has announced that it expects to keep the Official Cash Rate at its current level of 2 1/2 per cent until the second half of 2010, citing in particular the unwelcome appreciation of the NZ dollar. The retail deposit insurance scheme has also been extended for another year (following Australia), albeit with tighter limits on eligibility. Fiscal policy is providing discretionary stimulus over 2009-11, worth a cumulative more than 5% of GDP, by means of tax cuts, various job and unemployment benefit schemes, and accelerated infrastructure projects. The medium-term fiscal strategy announced in the 2009 budget postpones further planned tax cuts and sets limits on future expenditure growth. This leaves a significant stimulus in 2011 and will allow the deficit to start falling only as of 2012. Nevertheless, together with suspended contributions to the NZ Superannuation Fund, this programme may cap the government debt ratio at around 40% of GDP in 2017, before beginning to decline.

The pace of growth may be subdued

Growth may be less buoyant than in previous recoveries. The housing and business investment rebounds occur from very low bases and are premised, respectively, on the willingness of households to take on more debt and on an eventual easing of credit conditions to businesses. The consumption recovery reflects largely wealth impacts of the housing revival rather than earned income growth. Potential growth is temporarily projected to fall from pre-recession rates, given the recent shock to the capital stock, reducing slack and implying moderately rising inflation by next year. Indeed, the latest inflation figures have already surprised on the upside, despite still-weak economic conditions, suggesting that firms may be moving to rebuild their margins. The current account deficit, after narrowing substantially this year, is expected to widen again in 2010-11, though remaining well below the pre-recession peak.

Risks are on both sides

The main downside risk is that private investment may remain weak, or tilt in an un balanced way toward housing, given the long period of monetary easing. On the other hand, investment demand could surprise on the upside, especially if foreign markets were to take off strongly. In that case, the continuing fiscal stimulus could put unwelcome upward pressure on resources, increasing the burden on monetary policy.
New Zealand: Demand, output and prices

                           2006    2007   2008    2009   2010    2011

                          prices         Percentage changes, volume
                           NZD              (1995/1996 prices)

Private consumption         97.0    4.1   -0.1    -1.0    1.8     2.5
Government consumption      30.3    3.8    3.8     1.5    2.0     2.1
Gross fixed capital         38.5    4.9   -5.2   -11.2    8.9    10.4
Final domestic demand      165.8    4.2   -0.6    -2.8    3.3     4.2
  Stockbuilding (1)          0.0    0.1    0.0    -0.7    0.6     0.0
Total domestic demand      166.1    4.4   -0.1    -5.6    3.6     4.2
Exports of goods and        47.4    3.9   -1.3    -1.1    1.4     4.4
Imports of goods and        50.1    8.9    2.0   -16.8    9.0     9.6
  Net exports (1)           -2.7   -1.6   -0.9     5.3   -2.1    -1.5
GDP at market prices       163.4    2.9   -1.1    -0.7    1.5     2.7
GDP deflator                        4.2    3.6     2.6    2.5     2.2
Memorandum items
GDP (production)             --     3.2    0.0    -1.5    1.4     2.7
Consumer price index         --     2.4    4.0     2.3    2.2     1.9
Core consumer price          --     2.1    2.2     2.2    2.0     1.9
 index (2)
Private consumption          --     1.6    3.5     3.0    1.4     1.4
Unemployment rate            --     3.7    4.2     6.1    7.1     6.6
General government           --     5.0    3.1    -1.2   -3.3    -3.9
 financial balance (3)
Current account              --    -8.1   -8.8    -2.7   -4.4    -6.0
 balance (3)

Note: National accounts are based on official chain-linked
data This introduces a discrepancy in the identity between
real demand components and GDP For further details see OECD
Economic Outlook Sources and Methods (http://www.oecd.

(1.) Contributions to changes in real GDP (percentage of real
GDP in previous year), actual amount in the first column

(2.) Consumer price index excluding food and energy

(3.) As a percentage of GDP

Source: OECD Economic Outlook 86 database

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Publication:OECD Economic Outlook
Geographic Code:8NEWZ
Date:Nov 1, 2009
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