19 Mar 2013

NZ economic policies on right track, says IMF

12:44 pm on 19 March 2013

The International Monetary Fund says the Government and the Reserve Bank are on the right track to deal with the challenges that face the domestic economy, but the country would be vulnerable to large shocks in a global downturn.

The IMF estimates that when full year figures emerge this week, growth for 2012 will be 2.25% and said growth had strengthened over the last few months of last year.

It forecasts further growth averaging 2.5% due to a pick up in construction activity offsetting cuts in government spending, the strong New Zealand dollar and the impact of the drought.

However it has a warning about the housing market, especially in Auckland, and said prices could soar too high, heightening the risk of a fall in prices later.

Business and household balance sheets have improved since the global financial crisis but a global slowdown would hit commodity prices and New Zealand's terms of trade, and could make it more difficult for banks here to secure offshore funding.

The IMF said the country's reliance on agricultural exports for the near-term outlook means it is more vulnerable if there is a global economic downturn.

Low national savings and an expected widening of the current account deficit this year means the New Zealand's external liabilities are high by international standards.

The IMF describes current policies as appropriate, saying they strike a balance between the need to limit the growth of debt, while limiting any adverse effects on the economy.

Government 'treads moderate path'

Finance Minister Bill English said the report recognises government efforts to tread a path between spending restraint and economic growth.

He said one of the benefits of the moderate path the Government has taken since 2009 is predictability for public services, so that people know they're going to get their health services even though things are tight.

Mr English said a tighter rein on government spending is balanced by money flowing in for the Christchurch rebuild.

The Council of Trade Unions says the report ignores the effect the Government's management of the economy has had on inequality.

CTU economist Bill Rosenberg said the IMF team that came to New Zealand here mentioned inequality but excluded it from its report.

"The way that the Government has dealt with the economic crisis and coming back to surplus has had very distinct effects on who wins and who loses from it."

New Zealand Institute of Economic Research chief executive Jean-Pierre de Raad agrees with aspects of the report and says the Government is to be congratulated for working hard to get back to surplus.

But he told Morning Report its failure to prepare for long term costs of pensions and aged health care leaves it at risk of ballooning Government debt.