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Economic Backdrop

New Zealand is a parliamentary democracy which operates on free market principles. It has a large services sector and a sizable manufacturing sector complementing a highly efficient export-oriented primary sector.

Its land size is similar to Japan or the UK, with a resident population of 4.9 million. The climate is temperate, supporting agriculture, forestry and horticulture. It has abundant natural resources and makes wide use of hydroelectric power generation.

External trade is of fundamental importance to New Zealand. Primary sector products, commodities, manufactured products and services are all important sources of export income. Tourism is a key services export as New Zealand is a popular destination for overseas visitors. Additional services exports include information technology, transport, education, and financial and business services. Raw materials, consumer goods and capital equipment for industry are important components of New Zealand’s imports.

Chart 1: NZ GDP by Industry – Year Ended March 2017

Source: Stats NZ

New Zealand has had a freely floating exchange rate of its currency, the New Zealand Dollar (NZD), since March 1985. There are no exchange controls on foreign-exchange transactions undertaken in New Zealand. The NZD is one of the top ten currencies traded on a global basis[2].

Economic Performance

The New Zealand economy made a solid recovery from the 2008/09 recession, which was shallow compared to those in many other advanced economies. More recently, over the year to December 2017, the economy grew at an annual average rate of 2.9% in real terms. This was underpinned by low interest rates, population growth, (supported by strong migration inflows) investment and private consumption. Gross Domestic Product (GDP) per capita grew 0.7% on an annual average basis. The economy is forecast to grow at an annual average rate of nearly 3.0% over the forecast period (2018/19 to 2021/22) in real terms.

New Zealand generally runs a current account deficit. This has narrowed from around 8.0% of GDP during the mid-to-late 2000s to below 3.0% for the past two years. Over the same period, New Zealand’s net external liability position has improved from over 80% of GDP to under 55%.

New Zealand’s unemployment rate in the March quarter 2018 was 4.4%. Some spare capacity remains in the labour market, as indicated by contained wage growth. However, New Zealand has one of the highest labour participation rates in the OECD, measured at just under 71% by Statistics New Zealand in the March quarter 2018. The unemployment rate is forecast to fall to 4.1% within the forecast period.

Annual headline CPI inflation was above 2.0% in the March quarter 2017 for the first time since 2011, driven by food and oil price movements. Subsequent releases have seen inflation ease back close to 1.0%. Inflation excluding food and fuel prices remains subdued, indicating limited underlying inflationary pressures. Monetary policy continues to remain accommodative. Annual headline CPI inflation is forecast to pick up to 2.0% by the end of the forecast period.

Chart 2: NZ Total Exports - Destination - Year Ended December 2017

Chart 2: NZ Total Exports – Destination – Year Ended December 2017

Source: Stats NZ

Notes
  • [2] Bank for International Settlements, Triennial Survey, April 2016, percentage shares of average daily turnover.

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Last updated: 
Friday, 1 June 2018