IMF mixes warnings and praise for NZ

An International Monetary Fund (IMF) report warns New Zealand risks a recession, though a healthy banking sector should ensure a soft landing.

The IMF predicted New Zealand's gross domestic product growth would slow to 0.9 per cent in 2006, down from 2.2 per cent last year and 4.4 per cent in 2004.

In a May 2006 report -- titled New Zealand: Selected Issues -- it said New Zealand now had an economy fundamentally the same as those of Finland and Sweden before severe recession hit them in the 1990s .

"The empirical literature on sharp current account reversals suggests the economic situation in New Zealand displays many of the factors that contributed to sharp reversals in other countries," the report said.

"Imbalances in New Zealand at present are larger now than they were in 1997, the last time there was a significant correction in the current account balance."

The current account deficit widened to 8.8 per cent of GDP in 2005 from 6.6 per cent the year before and is forecast to widen further to 8.9 per cent in 2006.

Like Finland and Sweden, New Zealand had a real effective exchange rate well above the historic average, and its economy was relatively closed, the report said.

New Zealand rated only 19th of 30 OECD countries for openness of its economy, it said.

As in Finland and Sweden, current account deficits had widened, with housing booms playing a key role as they resulted in increased borrowing.

Household saving rates were falling, household debt was rising sharply, increasing household debt service burdens, the report said.

New Zealand's "robust financial system" would be a key element in achieving a smooth adjustment of the current account, the report said.

"The country seems therefore better prepared to achieve a smooth current account adjustment than Finland and Sweden in the early 1990s."

"New Zealand's healthy banking sector should ensure a soft landing," it said.

New Zealand had substantial room to manoeuvre on monetary policy with inflation likely being little changed from 2005, the IMF said. Inflation was projected at 3.1 per cent in 2006, compared with 3.0 per cent last year, the IMF said in its Article IV review of the economy.

"With underlying inflation likely on a downward path, monetary policy tightening has paused for the time being, and there is substantial room for manoeuvre if the economy slows too abruptly," the IMF said in a statement.

The Reserve Bank hiked interest rates to 7.25 per cent by the end of last year.

New Zealand's dollar appreciated to record levels by late 2005, undercutting exports, and the country saw an "exceptional" capital inflow driven by the global search for yield which combined to widen the current account deficit, the IMF said .

The exchange rate has depreciated significantly recently and could continue so rising exports are expected to bolster growth.

The housing market, meanwhile, has shown signs of cooling but house price behaviour is uncertain, the IMF said.

"Fiscal policy will be somewhat expansionary in coming years, reflecting government plans to raise support for families and strengthen social services, and provides a further cushion against downside risks," the global lender said.

- NZPA