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Economic growth is projected to ease to around 3% in 2017-18. A strong recovery in business investment, ongoing strength in tourism and the recent increase in dairy prices should support growth. Net immigration is assumed to fall, slowing both household consumption and, together with the wind-down in the Canterbury earthquake rebuild, construction expenditure, despite a planned boost to government infrastructure spending. Inflation is projected to rise sustainably to around the mid-point of the official 1-3% target range.
The Reserve Bank has tightened loan-to-value restrictions to limit financial stability risks from high household debt and increasing house prices. A debt-to-income limit should be added to the Bank’s macro-prudential instruments with attention to benefits exceeding costs. The Bank should begin to increase the policy rate from late-2018. The fiscal stance underlying these projections is mildly contractionary - the cyclically-adjusted budget balance is projected to rise by 0.6 percentage point of GDP between 2016 and 2018. Since the projections were finalised, the 2017 budget has been delivered. The fiscal stance is now neutral, which is appropriate.
New Zealand’s flexible labour market facilitates adjustment to globalisation. Such adjustment would be enhanced and costs to workers reduced by strengthening the education and training system to help people acquire skills in demand. To reduce costs to displaced workers, the government should consider introducing unemployment insurance and expanding training and job-search assistance.
Economic Survey of New Zealand (survey page)