IMF Says Downside Risks to N.Z. Economy Have Increased

(Bloomberg) -- New Zealand’s government and central bank need to be prepared to further support the country’s slowing economy after downside risks increased, the International Monetary Fund said.

The country’s GDP will expand 2.5% this year, on an expenditure basis, slowing from 2.8% last year, before advancing 2.7% in 2020, the IMF said as it released a 2019 Article IV consultation report on New Zealand. Key drivers of growth from earlier this decade -- reconstruction spending after the 2011 earthquake, high net migration, strong terms of trade and a housing boom -- have faded.

“Economic growth is expected to remain close to that of potential output, but risks to the growth outlook are tilted to the downside,” the IMF said. “Growth is expected to strengthen further in 2019-20 on the back of monetary and fiscal policy support, eventually leading to a small positive output gap and a gradual acceleration of inflation towards the 2 percent midpoint of the RBNZ’s target range.”

The Reserve Bank of New Zealand may cut interest rates again this year from a record 1% after data this week showed the economy grew at the slowest pace in more than five years in the second quarter. While the central bank expects low borrowing costs and more government spending to stimulate demand, most economists tip one more rate cut before the end of 2019.

The RBNZ’s recent easing makes sense given subdued inflation and the risks to the near-term outlook, the IMF said. Insufficient monetary accommodation would be a greater cause for concern than the potential for loose policy to lead to the economy overheating, the IMF said.

A severe downturn would push the RBNZ toward unconventional monetary policies, and the government also needs to be ready to use some of its “substantial fiscal space” in that event, according to the report.

To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net

To contact the editors responsible for this story: Shamim Adam at sadam2@bloomberg.net, Victoria Batchelor, Garfield Reynolds

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