In 1998, the economy contracted by 0.3% from the previous year. The weakness in overall GDP was confined to the first half of 1998, when the economy contracted by 1.6%. The Asian crisis led to a weakening in exports to Asia whilst a domestic drought in 1997/98 hit agricultural production and exports. At the same time, domestic demand was subdued reflecting weak confidence and the lagged effects of previously tight monetary policy. The economy rebounded strongly in the second half of 1998, growing by 1.3%. Much of the recovery was due to a rebound in agricultural exports from their earlier lows.

During 1998, domestic demand contracted by 0.1%, down on the 3.4% growth seen in the previous year. Growth in private consumption expenditure slowed to 1.6%, although this was relatively robust in the context of a contracting economy. Consumption growth was strongest for durable goods, supported by a recovery in motor vehicles following the removal of tariffs, and services. Investment weakened, contracting by 1.6% over the year, dragged down by a collapse in residential investment.

Net exports made a negative contribution to growth in 1998 as import growth outstripped only modest growth in exports. Export growth was hampered by a weakening in Asian markets, particularly reflected in poor tourism and forestry exports over the first half of the year, and a drought affecting primary production.

The first quarter of 1999 saw the economy continue to record solid growth. Seasonally adjusted GDP rose 0.7% in the March 1999 quarter. Strong domestic demand was the prime contributor to GDP in the quarter. Private investment registered a particularly strong quarterly rise, while private consumption recorded a sturdy increase over the quarter.

The strong domestic economy was primarily responsible for a surge in imports in the March quarter. This surge in imports more than offset robust quarterly growth in exports so that net exports continued to make a negative contribution to GDP.

Inflationary pressures moderated further during 1998 in line with a weak economy. Non-tradeable inflation eased, particularly as price pressures emanating from the housing market reduced. There were few signs of the earlier depreciation of the New Zealand dollar feeding through into domestic prices either, as a slack domestic economy limited firms' ability to increase prices. Weak international commodity prices and further tariff reductions have also helped to offset the inflationary impact of the lower exchange rate. Consumer prices rose by 0.4% in the year to December 1998, down from 0.8% a year earlier. Excluding credit services charges, annual inflation was 1.1% in December 1998.

This trend has continued through the early part of 1999. Consumer prices fell by 0.1% in the year to March 1999, and annual inflation excluding credit services charges eased to 1.0% in March.

Slowing growth of recent years, and the contraction in 1998, were reflected in a further softening of the labour market over 1998. During 1998 the number employed fell by an annual 0.6%, compared with 0.4% employment growth in 1997. This was reflected in a rise in the unemployment rate to 7.7% at the end of 1998.

The economic recovery resulted in a seasonally adjusted quarterly rise in employment of 0.9% in the March 1999 quarter. Accordingly, the unemployment rate fell to 7.2%.

Wage pressure, which tends to lag employment, moderated only slightly over the course of 1998. Ordinary time wages increased by 3.3% in the year to December 1998, compared with 3.4% growth in the previous year. Growth in private sector wages slowed more, to 3.1% in 1998 from 3.4% in the previous year, whereas public sector wage growth increased slightly.

Wage growth eased in the first quarter of 1999. Growth in ordinary time wages fell to 2.9% in the year to March 1999. Growth moderated in both private sector and public sector wages.

The current account deficit narrowed slightly over the course of 1998 to 6.1% of GDP, down from 7.1% a year earlier. A key contributor to the narrowing deficit was a narrowing of the investment income deficit. This reflected a fall off in returns to overseas investors on their investments in New Zealand, as the domestic economy slowed, and some improvement in returns to New Zealand residents on their overseas investments. Also contributing to the better result in 1998 was an increase in the merchandise trade surplus, which rose as a share of GDP to 1.6% from 1.2% in December 1997 (in 1997 New Zealand also imported a frigate, which temporarily depressed the trade surplus and hence the current account).

The first quarter saw the current account deficit widen to 6.5% of GDP. Improved returns to overseas investors and a weakening in the trade balance were primarily responsible for the widening in the current account deficit.

Statistics New Zealand are currently moving towards compiling the balance of payments data according to the IMF standards (fifth edition), and to compiling a quarterly capital account.

The New Zealand dollar (NZD) depreciated through much of 1998, continuing the trend seen since early 1997. Against the US dollar, the New Zealand dollar (NZD) fell to below US$0.50 in the third quarter of 1998, down from US$0.58 at end-1997 and a peak of around US$0.71 at end-1996. Through the final quarter of 1998 and early 1999 the New Zealand dollar has steadily appreciated, back to the US$0.53 to 0.55 range. On a trade-weighted basis, the NZD depreciated to a low of 55 in the fourth quarter of 1998, from a peak of around 69 in April 1997. By early-July the TWI had recovered to around 57.5.

New Zealand’s gross external debt was US$53.7 billion (103.2% of GDP) in March 1999, down from US$62.7 billion (100.4% of GDP) in March 1998.

Foreign direct investment into New Zealand was US$2.4 billion in the year to March 1998, up from US$1.9 billion in the previous year. The key components of foreign direct investment were reinvested earnings and other long-term capital investment inflows, predominantly long-term loans. Equity capital investment, however, fell off in the year to March 1998. New Zealand direct investment abroad in the year to March 1998 was a net investment of US$0.4 billion, largely representing reinvested earnings. This was the first time in three years that New Zealand parent enterprises did not dis-invest in their overseas subsidiaries.

The government has consistently achieved operating surpluses since 1994. In the fiscal year to June 1998, an operating surplus (on an accruals basis) of 2.6% of GDP was recorded. The operating surplus is expected to fall slightly in the year to June 1999, but will be significantly boosted by the government's gain on the sale of Contact Energy Limited. Lower tax revenue and increased expenses as a result of the slowing economy, however, have lowered the fiscal surplus excluding asset sales.

The size of the current account deficit and continued risks in the international environment make New Zealand relatively vulnerable to swings in investor confidence. To help maintain investor confidence in the economy, over 1998 the government has reduced its spending intentions for the fiscal years to June 1999 and June 2000 by a total of NZ$750 million (around US$420 million). Many of the changes were focussed on improving the medium-term fiscal position and included lowering the superannuation wage floor from 65% to 60% of the average wage.

Total government expenses represented 34.6% of GDP in the fiscal year to June 1998, up from 34.3% in the previous fiscal year. Government expenses are expected to increase modestly as a share of GDP over the year to June 1999.

The Reserve Bank of New Zealand is an independent central bank and is responsible for maintaining price stability in the New Zealand economy. Since December 1996, price stability has been defined as annual consumer price inflation (excluding credit services) between 0% and 3%. Prior to December 1996, price stability was defined as annual inflation of between 0% and 2%.

The Reserve Bank eased monetary policy through 1997 and 1998 as inflationary pressures eased and the amount of spare capacity in the economy increased. The easing in monetary policy initially occurred through a fall in the exchange rate, reflecting New Zealand’s then rising current account deficit, a weaker outlook for world growth, and falling commodity prices. Domestic interest rates remained relatively high until June 1998 when it became apparent that the domestic economy was struggling. From a peak of 10%, 90-day rates fell to a low of around 4% in late 1998 and early 1999.

More recently the Reserve Bank has adopted an overnight cash rate (OCR) target for implementing monetary policy. The OCR was first set in March at 4.5%, and has remained unchanged since then.

Following on from the economic recovery seen in the second half of 1998, economic activity is expected to expand at a steady rate through 1999. Lower interest rates, along with much improved confidence on the part of both businesses and consumers, is expected to sustain the domestic economy. Exports are also expected to strengthen, benefiting from the sharply lower exchange rate over the past two years and a more stable world environment. However, export growth is likely to be constrained somewhat by the effect of a second drought that occurred in 1998/99. As the amount of excess capacity in the economy declines, and as corporate profitability improves, business investment is also expected to increase. Over the next three years, growth is expected to average around 3%.

Employment growth is expected to show a modest improvement over 1999, lagging the recovery in the economy. Beyond 1999, however, employment growth is expected to rise and the unemployment rate fall back towards the 6% mark. Inflation is expected to lift as the amount of spare capacity in the economy is used up. Nevertheless, inflation is expected to remain well within the Reserve Bank of New Zealand’s target band for inflation (0% to 3%).

Looking forward, the external trade position, and the current account, are unlikely to show any significant improvement, as export growth is to a large extent offset by stronger demand for imports. However, the importation of a frigate (valued at 0.6% of GDP) in September 1999 will temporarily increase the current account deficit.

The Asian crisis has not led to a renewed reform agenda in New Zealand. However, it has highlighted the need for New Zealand to maintain a flexible economy that is able to adjust quickly to changing circumstances.

Over the past year the government has continued with its policy of tax and tariff reductions. In July 1998 personal income tax rates were lowered, as previously announced. Tariff reductions have also continued, and in May 1998 the tariff on motor vehicles was removed and the restriction on parallel importing removed. Also announced in 1998 was the intention to eliminate all tariffs by 2006. Other policies pending implementation include opening up the employers’ account of the compulsory accident insurance scheme to competition. This is scheduled to occur from 1 July 1999.

New Zealand: Overall Economic Performance

Source: Data are as submitted by member economies, unless otherwise specified.

Notes: (1) Budget balance refers to government accrual operating balance, June years

Table 2. Forecasting Summary (% change from previous year)

Note: The official figures for 1999 refer to March year 1999/00, the figures for 2000 refer to March year 2000/01, while the figures for 2000-2002 refer to the average for the three years to March 2002. The IMF forecast is from the World Economic Outlook (IMF, April 1999). The OECD forecast is from the OECD Economic Outlook (OECD, June 1999), the CPI figures refer to forecasts for the GDP deflator.