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Recent strong economic growth is projected to moderate to less than 3% in 2018. Both net migration and expenditure on the Canterbury earthquake rebuild are expected to slow gradually, slowing domestic demand, especially construction activity. The latest earthquake will entail rebuilding investment, but this is not included in the projection because it is too early to judge the economic effects. Growth will continue to be driven by tourism, with dairy price increases providing a further boost to incomes through the terms of trade. Inflation is likely to rise but remain below the mid-point of the official 1-3% target range.
The Reserve Bank has tightened loan-to-value restrictions in order to limit financial stability risks from the high levels of household debt associated with rapid house price increases. These increases have been fuelled by low interest rates, as the Bank has attempted to lift persistently below-target inflation. The fiscal stance is currently neutral to mildly contractionary.
The government has substantial fiscal space, but immediate fiscal stimulus would risk overheating the economy. To the extent that the resources used in the Canterbury earthquake rebuild are freed up in the course of 2017 and beyond, the government should fund infrastructure and increase funding to meet the challenges posed by inequalities and exclusion.
Economic Survey of New Zealand (survey page)