Economy and Trade
New Zealand is composed of two main narrow and mountainous islands, the North Island and the South Island, separated by Cook Strait, and a number of smaller outlying islands. It has a population of just 4.2 million. New Zealand has a mixed, open economy, which operates on free-market principles. In the 1980s, the country embarked upon a major reform program that deregulated the economy and improved its international competitiveness. Historically, the economy has been based on exports from a very efficient agricultural system. Leading agricultural exports include dairy products, meat, forest products, fruit and vegetables, fish, and wool.
The economy has diversified and now includes a range of manufacturing industries, although exports remain oriented around agriculture. Services account for around two-thirds of New Zealand’s GDP, while manufacturing accounts for 15%. New Zealand’s main export markets include Australia (which accounts for around a quarter of overseas sales), the European Union, the United States, Japan, and China. These countries also account for much of New Zealand’s imports.
Economic Policy over 12 Months
The operation of fiscal policy in New Zealand is governed by the Public Finance Act 1989, which requires the government to outline its fiscal policy intentions in an annual Fiscal Strategy Report. The government announced an expansionary budget (including tax cuts and higher government spending) in May 2008, prior to elections in November, which saw the Labour Party lose power to a National Party-led coalition after nine years in office.
In early October 2008, the Treasury released a pre-election economic and fiscal update indicating that, after 14 years in surplus, the budget balance was set to slip into deficit. However, New Zealand is still in a strong fiscal position after recording large budget surpluses during the current decade. Thus, the new government has the scope to implement pre-election promises to cut income taxes further and increase infrastructure spending to counter the economic slowdown.
During the first half of the year, the primary concern of the central bank, the Reserve Bank of New Zealand (RBNZ), was containing inflation—despite gathering evidence that the country faced a long recession. Surging prices for fuel and other commodities fueled inflation, which rose to 3.2% in December 2007 and, throughout 2008, remained above the 1–3% range officially targeted by the central bank.
The central bank increased its Official Cash Rate to 8.25% in July 2007 and it remained at this level until July 2008, when it fell to 8%. During the remainder of the year, the RBNZ slashed rates to 3.5%, reflecting a fall in international commodity prices as well as the rapid deterioration in the global economy.
New Zealand’s banks have not experienced the significant financial losses associated with housing lending that have been at the heart of the global financial meltdown. The country’s banks have also benefited from effective action by the RBNZ to improve liquidity. From 2009, the RBNZ assumed responsibility for the supervision of non-bank financial institutions, with the aim of improving governance and risk management.
The government has taken a number of measures to stabilize domestic financial markets. In October 2008, the minister of finance announced the introduction of a retail deposit guarantee scheme, covering all retail deposits of participating New Zealand-registered banks and non-bank deposit-taking entities for a period of two years. In early November, the minister announced the introduction of a temporary opt-in wholesale guarantee facility, which will cover the wholesale debt of investment-grade New Zealand financial institutions.
Economic Performance over 12 Months
The global economic crisis has had an even more marked impact on New Zealand than on other advanced economies. This reflects the large macroeconomic imbalances that had built up over the previous decade—inflation, housing overvaluation, high household debt, and a huge current account deficit—as well as New Zealand’s reliance on international trade.
Thus, New Zealand entered into a recession in the first quarter of 2008 (at a time when other advanced economies were still hopeful of avoiding a recession entirely). In February 2009, the deputy governor of the central bank, Grant Spencer, said that “the consensus” for the bottom of the economic cycle was probably in the second half of 2009 and that recovery would get underway in 2010.
The economy contracted for a third successive quarter in the three months ending in September 2008, according to an official report released in January 2009. The report added that all sectors of the economy were experiencing weakness. The economy is likely to shrink by 0.2% in the year ending 31 March 2009, after expanding by 3.2% in the previous 12 months, according to the average estimate of 11 economists surveyed by the New Zealand Institute of Economic Research in Wellington in February 2009.
Unemployment rose to a five-year high of 4.6% in the fourth quarter of 2008. The government’s December Quarterly Survey of Business Opinion also found that businesses had reported laying off more staff in December than in previous months, while a net one in three firms expected staff numbers to decline in the March quarter, consistent with rising unemployment in 2009. In a further blow to consumer sentiment, house prices are falling fast. In January 2009, they were 8.3% lower than in the same month in 2008.
However, the recession has had a positive impact on inflation, which fell from a near two-decade high of 5.1% in September to 3.4% in December, largely due to lower fuel prices. The decline in inflation in the final quarter of 2008 was the largest in a decade. The country’s Consumer Price Index actually declined by 0.5% during the three months to December 2008, raising the spectre of deflation.
In the year to the end of September 2008, the current account deficit stood at NZ$15.5 billion, equivalent to 8.6% of GDP, slightly up on the 8.4% recorded in the year to the end of June 2008. Ratings agencies have repeatedly warned that they could cut New Zealand’s sovereign credit rating if the deficit does not fall.
Support for Inward Investment and Imports
New Zealand encourages foreign investment without discrimination. The Overseas Investment Office (OIO) must give consent to foreign investments that would control 25% or more of businesses or property worth more than NZ$100 million. Restrictions and approval requirements also apply to certain investments in land and in the commercial fishing industry.
New Zealand has a relatively simple, low-cost tax system compared with other countries. It operates a broad-based tax regime, designed to be comprehensive, with few exemptions and incentives.
GDP growth: −0.2% (April 2008–March 2009) estimate from New Zealand Institute of Economic Research
GDP per capita: US$28,500 (2008 est.)
CPI: 3.4% (December 2008) government figures
Key interest rate: 3.5% (February 2009)
Exchange rate versus dollar: New Zealand dollars (NZD) per US dollar—1.4151 (2008 est.)
Unemployment: 4.6% (Q4 2008) government figures
FDI: US$72.41 billion (2008 est.)
Current-account deficit/surplus −US$9.047 billion (2008 est.)
Population: 4,173,460 (July 2008 est.)
Source: CIA World Factbook except where stated