New Zealand: Cushioning the downturn
New Zealand has entered recession ahead of other OECD countries, a victim of simultaneous domestic and foreign shocks. The outlook remains subdued because the large macroeconomic imbalances built up over the past decade–inflation, housing overvaluation, high household debt and a huge current account deficit–will take some time to unwind.
Macroeconomic policies are in a good position to cushion the downturn. Tight monetary policy, in place for some time, is now being eased, and a fiscal expansion is starting from a point of significant surplus and low debt. It will be important to maintain the strong inflation targeting and fiscal sustainability frameworks and to facilitate the shift of resources to the tradeables sector. The main risk is the possibility of more costly offshore funding and, in particular, the heightened risk aversion which could cause further reductions in the carry trade, unwanted currency depreciation and higher inflation.