New Zealand: Risk Assessment
Country Risk Rating
Business Climate Rating
- Proximity to Asia and Australia
- Tourist appeal
- Large and competitive agricultural sector (world's leading exporter of dairy products)
- Balanced public accounts and contained public debt
- Good corporate health: only 86 bankruptcies reported in 2018/2019 (lowest rate in 20 years)
- Dynamic demographics thanks to immigration
- High quality of life
- Island nation
- Dependency on foreign investment
- High household and corporate debt levels (especially in agriculture)
- Reliance on Chinese demand
- Shortage of skilled labor
- Housing shortage and soaring prices (+60% since 2008)
- Lack of R&D and low labor productivity growth compared with other OECD countries
Growth is expected to remain robust in 2020, supported by accommodative monetary and fiscal policies. The central bank's policy rate, which reached a record low of 1.0% in August 2019, could be cut further to encourage inflation to increase to the upper half of the target range (1-3%). Private consumption (60% of GDP) is expected to grow only modestly, penalized by lower population growth (due to reduced immigration), a cooling housing market and household debt (about 160% of disposable income). However, it stands to benefit from higher real wages (thanks to low unemployment and minimum wage hikes in April 2019 and again in 2020) and support for public spending, as the 2019/2020 budget includes an increase in benefits.
Investment growth (domestic and foreign, 20% of GDP) is expected to slow as a result of low business confidence in government policy, labor costs and availability, and thin profit margins. In particular, the government's decision to curb immigration (by making it tougher for low-skilled workers and students to get visas, theoretically to reduce pressure on housing prices) raises concerns about a future labor shortage and is viewed as a populist measure. However, public investment, combined with favorable terms of trade and low interest rates, will mitigate these effects. Real estate investment should be supported by high demand, despite capacity constraints in construction.
Net exports are expected to contribute positively to growth, benefiting from the weakness of the New Zealand dollar, which should also constrain imports. However, as a small and very open economy, New Zealand would suffer from a global economic downturn. Agricultural products, in particular dairy and meat products, constitute the bulk of goods exports, leaving the external sector exposed to commodity price fluctuations and climatic hazards. The growth in demand for protein in developing economies – particularly in Asia, which accounts for half of exports – will support meat, dairy and horticultural product prices. Tourism, the leading export sector, should do well.
Strong fiscal position but an imbalanced current account
The 2019/2020 budget, which is the first-ever "well-being" budget, provides for an increase in public spending. The budget deficit, however, should be small, with the government still committed to keeping net debt below 20% of GDP by 2022. Social spending is the main expenditure item, including income tax exemptions for very low-income people and increases in family allowances. Investments are also expected in infrastructure and housing, including through the KiwiBuild program. In addition, tax incentives for private investment in R&D will be extended, with the objective of increasing R&D to 2% of GDP.
The current account deficit is expected to remain stable, reflecting a structural income deficit (3% of GDP) linked to profit repatriations by foreign investors. The services surplus (1.5% of GDP), due in particular to tourism, will be offset by the trade deficit generated by substantial capital goods imports and currency depreciation. The current account deficit is mainly financed by portfolio investments and, to a more marginal extent, FDI, making the country vulnerable to capital outflows. External debt (more than 90% of GDP), which is significant due to household housing debt, is mainly contracted in New Zealand dollars.
The coalition government carries on
The 2017 parliamentary elections resulted in a majority-free Parliament and the formation of a coalition government between the Labour Party, the populist New Zealand First Party and the Green Party. Labour Prime Minister Jacinda Ardern continues to enjoy high popularity, which should put the Labour Party in poll position for the parliamentary elections scheduled for November 2020. The coalition does not appear to be under threat, although bad behavior and resignations within the Labour Party and the government have tarnished its image. Nevertheless, disagreements between the coalition parties could weaken it, especially since the National Party, which held power between 2008 and 2017, remains a powerful opposition force in Parliament, and the parties will probably seek to differentiate themselves in the run-up to the elections.
Internationally, the country will benefit from being a (founding) member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). However, with its main trading partners being the United States and China (more than a third of New Zealand's trade), this will create uncertainty in the global context of the trade war, rising protectionism and a global economic slowdown.