Monetary Policy Statement · i RESERE BANK F NE ZEALAN / MONETA POLIC STATEMENT, NEMBER 2018...

iRESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, NOVEMBER 2018

Monetary Policy StatementNovember 2018

iiRESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, NOVEMBER 2018

Report and supporting notes published at:

https://www.rbnz.govt.nz/monetary-policy/monetary-policy-statement

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Copyright © 2018 Reserve Bank of New Zealand

This report is published pursuant to section 165A of the Reserve Bank of New Zealand Act 1989.

ISSN 1770-4829

https://www.rbnz.govt.nz/monetary-policy/monetary-policy-statement

https://www.rbnz.govt.nz/email-updates

1RESERVE BANK OF NEW ZEALAND/MONETARY POLICY STATEMENT, NOVEMBER 2018

Monetary Policy StatementNovember 2018

Projections finalised on 31 October. Data finalised on 31 October. Policy assessment finalised on 7 November.

Policy Targets Agreement 2

1. Policy assessment 4

2. Key policy judgements 5

Box A: Recent monetary policy decisions 13 Box B: Petrol prices and monetary policy 15

3. Domestic activity and employment 17 Box C: Summary of recent business visits 25

4. Prices and costs 26

5. International and financial markets developments 31

Contents 6. Statistical appendix 35

6.1 Key forecast variables 36 6.2 Measures of inflation, inflation expectations, and asset prices 37 6.3 Measures of labour market conditions 38 6.4 Composition of real GDP growth 39 6.5 Summary of economic projections 40


Policy Targets Agreement

Context

The Government’s economic objective is to improve the wellbeing and living standards of New Zealanders through a sustainable, productive and inclusive economy. Our priority is to move towards a low carbon economy, with a strong diversified export base, that delivers decent jobs with higher wages and reduces inequality and poverty.

Monetary policy plays an important role in supporting the Government’s economic objective. The Government expects monetary policy to be directed at achieving and maintaining stability in the general level of prices over the medium term and supporting maximum sustainable employment.

This agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act). The Minister and the Governor agree as follows:

1 Monetary policy objective

a) Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices.

b) The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.

2 Policy target

a) The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

b) For the purpose of this agreement, the policy target shall be to keep future annual CPI inflation between 1 and 3 percent over the medium-term, with a focus on keeping future inflation near the 2 percent mid-point.

c) The Bank will implement a flexible inflation targeting regime. In particular the Bank shall, in pursuing the policy target:

i. have regard to the efficiency and soundness of the financial system;

ii. seek to avoid unnecessary instability in output, employment, interest rates, and the exchange rate; and

iii. respond to events whose impact on inflation is expected to be temporary in a manner consistent with meeting the medium-term target.


3 Transparency and accountability

a) The Bank shall implement monetary policy in a transparent manner. In addition to the requirements of section 15 of the Act the Bank shall in its Monetary Policy Statement (MPS):

i. explain what measures it has taken into account in respect of meeting the requirements of section 2(c) and explain how these matters have been taken into account in its implementation of monetary policy; and

ii. when inflation outcomes, and/or expected inflation outcomes, are outside of the target range explain the reasons for this; and

iii. explain how current monetary policy decisions contribute to supporting maximum levels of sustainable employment within the economy.

b) The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.

Dated at Wellington this 26th day of March 2018


As capacity pressures build, core consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.

Downside risks to the growth outlook remain. Weak business sentiment could weigh on growth for longer. Trade tensions remain in some major economies, raising the risk that trade barriers increase and undermine global growth.

Upside risks to the inflation outlook also exist. Higher fuel prices are boosting near-term headline inflation. We will look through this volatility as appropriate. Our projection assumes firms have limited pass through of higher costs into generalised consumer prices, and that longer-term inflation expectations remain anchored at our target.

We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.

Meitaki, thanks.

Adrian Orr, Governor.

Chapter 1Policy assessment

Tena koutou katoa, welcome all.

The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and into 2020.

There are both upside and downside risks to our growth and inflation projections. As always, the timing and direction of any future OCR move remains data dependent.

The pick-up in GDP growth in the June quarter was partly due to temporary factors, and business surveys continue to suggest growth will be soft in the near term. Employment is around its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.

GDP growth is expected to pick up over 2019. Monetary stimulus and population growth underpin household spending and business investment. Government spending on infrastructure and housing also supports domestic demand. The level of the New Zealand dollar exchange rate will support export earnings.


Drivers of growth

Conditions are in place for a sustained economic expansion. Fiscal stimulus, monetary stimulus, and the lower exchange rate are all supporting economic activity. Despite these drivers, business surveys indicate that firms’ activity is expanding only slowly. Risks to global growth, such as international trade tensions, continue to increase.

Government spending is supporting activity. The Families Package increased household incomes from the start of the September quarter. Plans for spending and investment announced in Budget 2018 are expected to support growth. The KiwiBuild programme is assumed to add to the rate of house building from the second half of 2019.

Net exports are increasing, partly as a result of the exchange rate depreciation seen since mid-2017. As the composition of activity becomes less import-intensive, GDP growth is expected to increase. Although households’ purchasing power is lower as a result of the lower exchange rate, this is more than offset by slower growth in import volumes.

Chapter 2Key policy judgements

• GDP growth is expected to be subdued in the near term, with businesses reporting that their activity has weakened. Growth is expected to pick up moderately over 2019, supported by fiscal stimulus and easier monetary conditions.

• Underlying inflation is slightly below 2 percent, but has been steadily increasing. Firms’ input costs, such as fuel prices and wages, are increasing. Consumer price inflation remains contained despite these higher costs. Inflation could rise excessively if firms rapidly pass on costs.

• Employment is near its maximum sustainable level. Higher GDP growth is expected to drive employment slightly above this level. Increasing capacity pressure, supported by ongoing monetary stimulus, should support the rise in underlying inflation towards the 2 percent target mid-point.

• The outlook is subject to numerous uncertainties and judgements. Two key assumptions are that firms continue to adjust prices only gradually as costs increase and that weak business sentiment does not signal a lasting downturn in demand.


Stimulatory monetary policy is expected to support growth and employment, contributing to an increase in the use of resources to the point where capacity pressure develops (figure 2.1). Rising capacity pressure will help to lift underlying inflation, ensuring that it returns sustainably to the 2 percent target mid-point.

Despite the fiscal and monetary stimulus underpinning growth, surveyed business activity is currently weak. Businesses’ employment and investment intentions have declined in recent quarters. This evidence suggests that demand has slowed, and hence quarterly GDP growth is expected to remain subdued in the near term (figure 2.2).

The GDP growth outlook assumes that weak business sentiment does not have a lasting negative effect on growth. However, if firms’ actual investment and hiring declines as a result of weak sentiment or compressed profit margins, growth could be weaker than projected.

The world outlook poses downside risks to domestic growth. Financial conditions have tightened in some Asian economies, and economic growth in China has slowed. Ongoing trade tensions remain a source of uncertainty. These factors have contributed to volatility in international financial markets. Higher volatility has not yet affected our central outlook for the New Zealand economy. We will continue to closely monitor the risks arising from the international economy.

Inflation developments

Inflation is increasing from its previous low levels. Fuel price rises over the past year have increased the cost of living and placed pressure on household budgets. The increase in fuel prices in the September quarter saw annual headline CPI inflation rise to 1.9 percent. Measures of core inflation, which remove the effects of volatile items such as fuel, have

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Figure 2.1 Output gap

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Source: RBNZ estimates.

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Figure 2.2 GDP growth

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Source: Stats NZ, RBNZ estimates.


moved higher, but generally remain slightly below the 2 percent target mid-point.

Once the direct effect of higher fuel prices has passed, headline inflation is projected to drop temporarily below 2 percent (see box B). Over the medium term, rising capacity pressure is expected to lift inflation to around 2 percent (figure 2.3).

Input cost pressures for firms are building. Fuel prices have increased significantly, largely reflecting increases in international oil prices. Recent pay equity settlements and minimum wage increases have led to higher labour costs. In addition, the depreciation in the exchange rate has increased the cost of imported inputs.

So far, these cost pressures have largely been absorbed in lower profit margins. The relatively slow pass-through of input costs into overall consumer prices is assumed to continue, in line with the experiences reported by businesses in recent business visits (see box C in chapter 3).

Aside from fuel, imported inflation is below average, as global inflationary pressure continues to pick up only gradually. Low import prices were a key factor keeping inflation low between 2012 and 2016.

Tradables inflation is expected to decline over the next year as the effect of the recent rise in fuel prices dissipates. This projection is based on the assumption that world oil prices decline slightly from their current level. Over the medium term, tradables inflation is expected to settle slightly below average as imported inflation remains modest, while increasing capacity pressure drives a rise in non-tradables inflation.

Headline inflation over the past six years has been subdued, consistent with firms being influenced by past low inflation when setting prices. This persistently low inflation could also be a result of other unmeasured shifts in the economy, such as high competitive pressure, technological improvements, or increasing labour market flexibility. Regardless of the underlying cause, inflation has been slow to increase, even as costs have risen and the profit margins of firms have been compressed.

We assume that this backward-looking pricing behaviour will persist, and as a result, underlying inflation will increase only gradually. However, if firms start passing through cost increases more quickly, headline inflation could increase more rapidly than projected.

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Headline inflation

Core inflation

Figure 2.3CPI inflation

(annual)


Note: Core inflation is the sectoral factor model measure.


Employment developments

We estimate employment to be near its maximum sustainable level (see chapter 3). Increasing labour supply has been absorbed by the labour market, lifting employment growth. However, firms report some difficulty in finding the type of labour they need.

Households are supplying labour at an unprecedented rate. The size of the population, labour force participation, and the employment rate have all increased significantly since 2012 (figure 2.4).

The increased supply of labour has been quickly absorbed, leading to declines in the unemployment rate (figure 2.5). The unemployment rate is projected to remain low as economic growth lifts employment above its maximum sustainable level, helping to drive underlying inflation towards 2 percent over the medium term.

Despite the high level of labour supply, firms report increasing difficulty in finding labour. This suggests that there might be some divergence between the type of labour households are supplying and the type that employers are looking for. There could be a number of possible causes for such a divergence, such as reluctance of workers to leave their current jobs, regional disparities in job opportunities, a lag between employers’ needs and workers’ training choices, or insufficient wage incentives for workers to upskill or move locations.

Overall, indicators of labour market tightness suggest that employment is near its maximum sustainable level. Further increases in employment growth would likely depend on firms raising wages faster to attract suitable workers, which would place upward pressure on inflation. A structural (sustainable) improvement in employment would require non-

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Figure 2.5 Unemployment rate

(s.a.)


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Participation rate

Employment rate

Figure 2.4Population, employment, and labour force participation

(rates as a share of working-age population, s.a.)



monetary approaches to improve the alignment of labour supply and demand (for example, through education and training programmes).

Monetary policy

The Policy Targets Agreement (PTA) specifies that the objectives for monetary policy are to keep future annual CPI inflation between 1 and 3 percent over the medium term, and to contribute to supporting maximum sustainable employment. In addition, the Bank is directed to avoid unnecessary instability in output, employment, the exchange rate, and interest rates, and to have regard to the efficiency and soundness of the financial system.

The labour market has tightened and core inflation has increased from its previous low level. However, GDP growth is expected to stay subdued in the near term. Past low inflation outturns are assumed to continue weighing on inflation. At the same time, cost pressures are increasing largely as expected, although recent increases in fuel prices have temporarily lifted CPI inflation. Stimulatory monetary policy remains necessary to ensure inflation continues to rise towards the target mid-point over the medium term (figure 2.6). There are risks on both sides of the policy outlook.

Scenarios

While the outlook for the OCR has changed little over the past year (see box A), recent developments suggest two possible scenarios that could shift the outlook for monetary policy. The first scenario shows how monetary policy would respond if inflation increased faster than projected due to faster pass-through of costs to prices. The second scenario shows the response if GDP growth remained low due to a sustained demand slowdown.

Scenario 1: Inflation increases faster due to faster cost pass-through

More rapid pass-through from recent cost increases could result in higher inflation. In our central projection, firms are assumed to continue adjusting prices only gradually in response to increasing costs. However, firms report that these higher costs are squeezing margins. There is a risk that firms could raise prices faster than we assume in response to these cost pressures.

In this scenario, annual non-tradables inflation initially rises by around 0.5 percentage points more over 2019 than in the central projection (figure 2.7). The OCR begins to rise in the second half of 2019 in response to stronger inflationary pressure (figure 2.9). CPI inflation is higher until the end of 2021. Stronger inflationary pressure means that a period of sustained positive capacity pressure is no longer necessary for underlying inflation to settle near 2 percent. As a result, there is less need

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Figure 2.6Official Cash Rate



for monetary stimulus. By late 2020, the OCR is around 70 basis points higher than in the central projection, and inflation converges back to around 2 percent.

Scenario 2: Softer growth continues

Fewer businesses have reported an increase in activity over the past year, despite improving global conditions, strong population growth, and low interest rates. This reported slowdown in activity is expected to appear in GDP growth in the near term, with growth temporarily subdued in our central projection. However, if deteriorating business sentiment signals a lasting decline in domestic demand, GDP growth may remain weak for longer than expected.

In this scenario, a demand slowdown sees annual GDP growth stay below 3 percent over 2019 (figure 2.8). Softer GDP growth results in employment falling relative to its maximum sustainable level and the unemployment rate increasing. As it becomes clear that growth is not increasing as expected, the OCR would need to be reduced by about 75 basis points below the central projection (figure 2.9). Weaker capacity pressure in the scenario sees inflation increase more gradually. By 2020, the monetary policy response starts to boost growth, raising employment to around its maximum sustainable level and CPI inflation to 2 percent.

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Central

Inflationincreases

faster

Figure 2.7Non-tradables inflation

(annual)


Note: The scenario shows the complete response of non-tradables inflation, including the effect of the subsequent reaction of monetary policy.

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Figure 2.8 GDP growth

(annual)


Note: The scenario shows the complete response of GDP growth, including the effect of the subsequent reaction of monetary policy.


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Figure 2.9 Official Cash Rate



Table 2.1

Key judgements and risks

Overarching narrative Key judgements Risk to OCR1

Robust global growth continues

GDP growth in our major trading partners averages around 3.5% over the projection. Trade restrictions have a limited impact on the global growth outlook, but there are risks of a more adverse scenario.

Central banks continue to withdraw monetary stimulus, leading overseas interest rates to increase relative to New Zealand. The New Zealand dollar TWI remains around 72 over the projection, with risks to the downside.

Global inflationary pressure rises gradually

Inflationary pressure in our major trading partners edges up only gradually.

Import price inflation in world terms is slightly below its post-2000 average over the projection.

Dubai oil prices fall from around USD 80 per barrel to USD 70 per barrel.

Whole milk powder prices stay around USD 3000 per metric tonne.

New Zealand GDP growth rises above trend, as fiscal and monetary stimulus support demand

GDP growth exceeds potential growth as temporary softness unwinds over 2019. Low business confidence does not translate to persistently lower growth.

Annual house price inflation subsides from around 5% in 2018 to around 2% from 2020.

Household consumption growth slows as house price inflation slows and net immigration declines.

Annual net immigration falls from 50,000 in 2018 to 30,000 in 2020, reducing aggregate demand.

Export volumes grow in line with potential, while import volume growth declines due to the depreciation of the exchange rate seen since mid-2017.

KiwiBuild adds to residential investment gradually from mid-2019. Government spending and increased transfers to households support GDP growth from the second half of 2018.

With little slack left, capacity pressure builds as demand growth outstrips supply

Employment is around its maximum sustainable level and the output gap is close to zero.

Labour force participation remains around 71% of the working age population.

Unemployment rate falls to 4.2% and the output gap to reach 0.6% of potential output by 2021.

Inflation rises gradually to the 2 percent target mid-point

Non-tradables inflation increases gradually, as capacity pressure increases and the dampening effect of past low inflation gradually fades.

Tradables inflation increases, but remains subdued.

Pass-through of higher petrol prices into other consumer prices is limited.

Wage inflation rises from around 2% in 2018 to over 2.5% by 2021. Minimum wage changes are mostly absorbed in firms’ margins and have a small impact on CPI inflation.

1 Risk indicators refer to balance of risks to the OCR from each of the individual key judgements. Balanced risks | Upside risks | Downside risks


Box A

Recent monetary policy decisions

Monetary policy decisions since 2016

The Bank has held the OCR at 1.75 percent since late 2016, with the view that monetary policy would remain accommodative for a considerable period. Through 2017 and the first half of 2018, the projected path for the OCR was broadly flat and stable. There was no clear reason to deviate from this stimulatory monetary policy stance, as the impacts of economic developments on the OCR were offsetting.

GDP growth declined from mid-2016 to early 2018, in part because of lower house price inflation and less growth in residential construction. As a result, the output gap did not increase as expected. Core inflation and wage inflation remained low.

Although GDP growth was lower than expected, labour market conditions appeared to tighten. The unemployment rate declined between 2016 and 2018, and business surveys indicated that firms found it increasingly difficult to find labour. At the same time, the outlook for growth was supported by fiscal stimulus and improving global conditions.

In the May 2018 Statement, the Bank noted that the next OCR move could be up or down. By the August 2018 Statement, downside risks to the growth outlook were becoming apparent. The Bank reduced the slope of the OCR path to signal the need for more prolonged monetary stimulus (figure A.1).

Just before the May 2018 Statement, the objectives for monetary policy were adjusted to include keeping future annual CPI inflation between 1 and 3 percent over the medium term and contributing to supporting maximum sustainable employment. In the next two Statements, employment was thought to be near its maximum sustainable level, but inflation remained low. The Bank’s judgement was that monetary policy needed to remain stimulatory to ensure inflation would continue to increase towards the target mid-point.

Monetary policy decisions 2013-2016

Under the current Reserve Bank Act (1989), monetary policy decisions are made by the Governor as single decision maker. It is a long-standing practice for this formal decision to be supported by advice from senior

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Figure A.1Official Cash Rate



policy experts. Figure A.2 provides the distribution of OCR advice for decisions between 2013 and 2016. It shows the balance of internal advice through the tightening cycle in 2014 and the loosening cycle in 2015-2016. Figure A.3 shows the corresponding actual OCR moves at each decision.

Generally, there was a clear majority in the balance of advice. Should the current Reserve Bank Amendment Bill become law, our intention would be to publish the formal votes of the Monetary Policy Committee each time a vote is taken. It is envisaged that a vote would not be called for every meeting, but only when needed.

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Figure A.2Distribution of internal OCR advice

Source: RBNZ.

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Figure A.3Official Cash Rate

Source: RBNZ.

Note: The level of the OCR is shown as at each decision. There were eight decisions per year from 2000 to 2015, and seven decisions per year since 2016.


Box B

Recent petrol price increases and monetary policy

Petrol price inflation was the main contributor to the recent lift in headline inflation. Global oil prices have increased over the past year, and the New Zealand dollar has depreciated. Annual headline inflation is projected to increase to slightly above 2 percent over the next six months, before dipping below 2 percent as the effect of higher fuel prices drops out in mid-2019. Announced national fuel excise tax increases will add to fuel price inflation for three years from the December 2018 quarter, but the contribution to CPI inflation will be small. Looking beyond short-lived volatility, fuel prices are expected to have only a limited effect on underlying inflationary pressure.

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Figure B.1Regular petrol retail price

Source: MBIE.

The PTA directs the Bank to ‘respond to events whose impact on inflation is expected to be temporary in a manner consistent with meeting the medium-term target’. As a result of this medium-term focus, the initial effects of higher petrol prices on headline inflation do not require a monetary policy response. However, petrol prices can have a lasting effect on the economy through other channels, which may be important for monetary policy.1 There are three channels through which petrol prices affect overall inflationary pressure:

• First-roundeffects – A one-off shift in the price of petrol has only a transitory direct effect on inflation. Therefore, monetary policy ‘looks through’ these first-round effects.

• Second-roundeffects – The indirect effect of higher petrol prices on other goods and services in the economy. For example, higher petrol prices affect transport costs, which could raise the prices of a broader range of goods. Although these effects are more widespread, the Bank would continue to look through such developments to the extent that they are temporary. However, a higher-inflation environment may affect price- and wage-setting behaviour. If changes in behaviour are long-lasting, then monetary policy will need to respond to offset higher medium-term inflationary pressure.

• Third-roundeffects – Higher petrol prices mean that households have less disposable income to spend on other goods and services, dampening consumption and domestic demand. The increase in petrol prices over the past year suggests a reduction in

1 See Delbruck, F., (2005) ‘Oil prices and the New Zealand economy’, Reserve Bank of New Zealand Bulletin, Vol. 68, No. 4, December.


average annual household disposable income of about $400.2 To the extent that lower domestic demand feeds through into reduced capacity pressure, monetary policy may need to become more stimulatory to support employment and medium-term inflation.

The Bank looks through first-round effects, but the net effect on medium-term inflationary pressures from second- and third-round effects is uncertain. The Bank will continually assess its judgements in this area.

The Bank will continue to monitor:

1. inflation expectations and pricing behaviour, for signs that higher fuel prices are affecting firms’ behaviour in a persistent manner; and

2. household demand, for any sign that higher petrol prices are dampening consumer spending by more than expected.

2 Based on the latest Household Economic Survey data (2017) on household spending patterns and petrol consumption.


• GDP growth has slowed since its most recent peak in 2016, although some temporary factors lifted growth in the June 2018 quarter. At present, surveyed measures of firms’ activity are weak.

• The labour market has tightened since 2016, despite the slowdown in growth. A range of indicators show that employment is near its maximum sustainable level and the output gap is close to zero.

• Fiscal and monetary stimulus, and higher net exports are projected to support growth and increase capacity pressure over the medium term.

Domestic activity

GDP growth has slowed since its most recent peak in 2016. Annual GDP growth in the June 2018 quarter was 2.8 percent, slightly lower than our estimate of the economy’s potential growth rate.

Following a few quarters of low growth, production GDP increased by 1.0 percent in the June 2018 quarter (figure 3.1). This was stronger than expected in the August Statement. This uptick has been mainly driven by temporary factors, such as strength in services, utilities and primary production.

The slowdown in growth since 2016 has coincided with moderating growth in household spending and falling measures of surveyed business activity. Growth in household consumption has dropped considerably from its 2016 peak, in line with declining house price inflation (figures 3.2 and 3.3). Residential investment contributed strongly to growth for several years and remains at a high level. However, residential investment has eased slightly as a share of potential output since 2016 (figure 3.4).

Chapter 3Domestic activity and employment


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Figure 3.3House price inflation

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Source: CoreLogic, RBNZ estimates.

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Figure 3.1GDP growth

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Figure 3.2Consumption growth

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Figure 3.4 Residential investment

(share of potential output, s.a.)

Source: StatsNZ, RBNZ estimates.


Note: The dashed line represents the average realised rate of growth since 2000.


We estimate quarterly GDP growth to be modest over the second half of 2018. Near-term growth is expected to be supported by household consumption, which is boosted over the next few quarters by higher labour incomes, the Government’s Families Package, and population growth. However, households’ disposable incomes are being squeezed by higher petrol prices, which we expect to weigh on consumer spending. Measures of firms’ activity from the Quarterly Survey of Business Opinion (QSBO) point to weak domestic demand weighing on GDP growth in the near term (figure 3.5). Business investment growth is also expected to decline over the near term, consistent with the sharp fall in firms’ surveyed investment intentions.

Over the medium term, GDP growth is expected to increase. Government spending, stimulatory monetary policy, and higher net exports all contribute to the expected rise in activity. However, risks to the medium-term growth outlook are to the downside.

Government spending supports growth over the projection. The Government’s KiwiBuild programme is expected to contribute to residential investment over the second half of the projection. Residential construction activity may be weaker than projected, with risks on both the supply side (binding capacity constraints) and the demand side (low house price inflation could reduce the incentive to build).

Accommodative monetary policy has contributed to easier financial conditions, seen in lower fixed mortgage rates and a lower exchange rate (see chapter 5). The lower exchange rate and ongoing growth in global demand are expected to support export volumes (figure 3.6).

Over the next couple of years, slower growth in import volumes is the main driver of higher net exports. The weaker exchange rate and hence higher import prices are expected to drive a substitution towards

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Domestic trading activitypast 3 months (RHS)

Figure 3.5 Domestic trading activity and GDP growth

(s.a.)

Source: Stats NZ, NZIER, RBNZ estimates.

Note: Domestic trading activity measures the net percentage of firms that reported an increase in activity over the past three months.

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Figure 3.6Import and export volumes

(share of potential output, s.a.)



domestic goods and services. In addition, the composition of GDP growth is expected to become less import-intensive as growth in household consumption and business investment slows.

A key risk to the medium-term GDP growth outlook is that import volumes may be persistently higher than expected. There is also downside risk to the outlook for export volumes. Downside risks to global growth have increased and prices for some of New Zealand’s key commodity exports have softened recently.

Lower growth over the second half of 2018 is expected to keep the output gap close to zero (figure 3.7). However, over the medium term, capacity pressure is expected to build as GDP growth increases, driven by fiscal and monetary stimulus and higher net exports.

Growth in business investment is expected to recover over the medium term in response to increasing capacity pressure (figure 3.8). Over the projection, higher GDP growth and increasing labour costs should encourage firms to invest in capital. Recent business visits indicated that firms plan to invest in physical capital and automation in response to difficulty finding workers and increasing labour costs (box C).

Labour and capital constraints may be restricting firms’ ability to expand production. It is possible that capacity pressure is stronger than we currently estimate, given that there is always uncertainty around estimates of potential output. However, at present, the Bank’s indicators of capacity pressure suggest that the output gap is around zero.

2002 2005 2008 2011 2014 2017 2020 -4

-3

-2

-1

0

1

2

3

-4

-3

-2

-1

0

1

2

3% %

Projection

Aug MPS

Nov MPS

Figure 3.7Output gap

(share of potential output)


2002 2005 2008 2011 2014 2017 2020 -30

-20

-10

0

10

20

30

40

-30

-20

-10

0

10

20

30

40% %

Projection

Figure 3.8Business investment growth

(annual)



Labour market

The labour market has tightened since 2016, despite softer GDP growth. The unemployment rate has fallen during that time, to 4.5 percent in the June 2018 quarter.

The share of the population participating in the labour force is near a historical high. Since 2013, increases in participation, in addition to high population growth, have contributed to rapid growth in the labour force (figure 3.9). The labour market has more than absorbed this increase in supply, with employment growth outpacing labour force growth. Employment is at its highest ever level relative to the working-age population.

The labour force participation rate is assumed to remain steady at around 71 percent.1 This results in a high but stable share of the population being employed over the projection. While the labour force participation rate is expected to remain at high levels, labour force growth is expected to decline over the medium term due to falling net immigration (figure 3.10).

Over the next few years, employment is expected to grow faster than the labour force. The labour market is projected to tighten, with the unemployment rate dropping further over 2019 and 2020 (figure 3.11).

The risks to our labour market projection are balanced. On the downside, the projected moderation in near-term GDP growth could affect the labour market more than we have assumed, resulting in

1 See Callaghan, M., J. Culling and F. Robinson (forthcoming), ‘Ageing is a drag: projecting labour-force participation in New Zealand’, RBNZ Analytical Note.

2002 2005 2008 2011 2014 2017 2020 -20

-10

0

10

20

30

40

50

60

70

40

50

60

70

80

90

100

110

120000s 000s

Projection

Arrivals

Departures

Net (RHS)

Figure 3.10Permanent and long-term working-age migration

(quarterly, annual total)


2002 2005 2008 2011 2014 2017 2020 -1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7% %

Projection

Labourforce

Working-agepopulation

Figure 3.9Labour force and population growth

(annual)



lower employment growth and higher unemployment. Conversely, the labour market could tighten faster if labour demand remains high and labour force growth moderates. A tighter labour market could drive wage inflation higher and push CPI inflation above the target mid-point.

Maximum sustainable employment

The Reserve Bank interprets maximum sustainable employment as the highest utilisation of labour resources that can be maintained over time without generating an acceleration in inflation. A broad range of indicators suggests that employment is near its maximum sustainable level (table 3.1). Over the medium term, employment is expected to rise slightly above its maximum sustainable level, as stronger GDP growth boosts demand for labour.

Evidence reported by employers suggests the labour market is currently tight, and that employment is above its maximum sustainable level. However, the picture is mixed. Some other measures of unemployment and turnover suggest that some slack remains in the labour market. The divergence of indicators may suggest that if workers’ skills and abilities were better suited to employers’ needs, then employment could rise higher and still be sustainable.

Firms appear to be struggling to fill vacancies at all skill levels. QSBO measures of the difficulty of finding labour have risen (figure 3.12). During business visits, firms confirmed this story. Businesses across a broad range of industries said that they were having to lower their skill and quality requirements and raise wages to fill positions.

2002 2005 2008 2011 2014 2017 2020 3

4

5

6

7

61

63

65

67

69% %

Projection

Employment rate(share of working-age

population)

Unemployment rate (RHS)

Figure 3.11Employment and unemployment rates

(s.a.)

Source: Stats NZ, RBNZ estimates.2002 2005 2008 2011 2014 2017

-80

-60

-40

-20

0

20

40

60

-80

-60

-40

-20

0

20

40

60Net % Net %

Skilled

Unskilled

Figure 3.12Difficulty finding skilled and unskilled labour

(s.a.)

Source: NZIER, RBNZ estimates.

Note: Difficulty finding labour measures the net percentage of firms that reported an increase in difficulty finding skilled and unskilled workers over the past three months.


2002 2005 2008 2011 2014 201745

50

55

60

65

70

45

50

55

60

65

70% %

Figure 3.13Job-finding rate

(four-quarter moving average)


Note: The dashed line represents the average job-finding rate since 2000.

In contrast, some other indicators of the labour market suggest that employment may still be below its maximum sustainable level. One example is the job-finding rate, which is the proportion of unemployed people in the previous quarter who transitioned to employment in the current quarter. The data shows that the ease with which unemployed people can find work has not recovered significantly since the Global Financial Crisis (figure 3.13).


Note: The job-finding rate is the proportion of unemployed people in the previous quarter who transitioned to employment in the current quarter. The job-separation rate is the proportion of employed people in the previous quarter who transitioned to unemployment in the current quarter. Job-to-job flows measures employed people who move from one job to another, without a period of unemployment. The vacancy rate is the number of vacancies divided by the number of unemployed people. NAIRU stands for Non-accelerating Inflation Rate of Unemployment. The vacancy rate is calculated by taking the number of vacancies divided by the sum of vacancies and employment.

Indicator type Employment below MSE Employment at MSE Employment above MSEIndicator suite Unemployment rate gap (reduced-form

model) Employment rate gap (filled jobs)

Unemployment rate gap (structural model) Employment rate gap (total employment)

Unemployment Youth unemployment rate (15-19 years) Underemployment rate

Range of NAIRU estimates Underutilisation rate Medium-term unemployment rate Maori and Pacific unemployment rate Youth unemployment rate (20-24 years)

Business surveys

QSBO difficulty finding labour QSBO labour as limiting factor QSBO overtime worked

Flows data Job-finding rate Job-to-job flows

Other Job separation rate Vacancy rate

Table 3.1

Summary of indicators of employment and maximum sustainable employment


Box C

Summary of recent business visits

The Bank regularly meets with a range of organisations to improve our industry knowledge and understanding of current economic conditions. In our most recent round of visits, we spoke with 41 businesses across Auckland, Hamilton, Rotorua, Wellington, Christchurch, and Dunedin.

We engaged with businesses from a range of industries to better understand demand and investment intentions in light of low reported business confidence. In addition, we looked to inform our assessment of labour market conditions and to gauge cost pressure more broadly.

Most of the firms suggested that activity had remained robust over the past year. Investment intentions were generally strong, despite some uncertainty around government policy, with many firms noting that increasing labour costs would encourage capital investment. This was in contrast to the weakness in activity and investment intentions reported in business surveys. Firms were generally positive about growth going forward. However, capacity constraints may limit further strong growth, particularly in the construction industry.

Conversations with firms highlighted how difficult it is to find appropriate labour. Many firms were experiencing shortages of both skilled and unskilled labour. Employers were having to lower their skill and quality requirements to fill jobs. Wage growth was similar to, or higher than, previous years. Firms were concerned about further acceleration in labour costs due to minimum wage increases, union negotiations, and potential employment law changes.

There was little sense among firms that capacity pressures had eased, despite the slower GDP growth over the past 18 months. This was consistent with emerging cost pressure.

Cost pressures are coming from a range of factors, including rising labour costs, rising materials costs, a lower exchange rate, increasing distribution costs, and increasing regulatory compliance costs.

For many firms, cost increases were resulting in deteriorating margins, rather than increased prices. Firms said there were several reasons why they were absorbing cost increases, rather than passing them on to prices:

• perceived competition in their industry;

• limited pricing power for firms competing in global markets; and

• fixed-price, long-term contracts, particularly in the construction sector.


Consumer price inflation

Annual CPI inflation increased to 1.9 percent in the September 2018 quarter (figure 4.1). CPI inflation has been temporarily boosted by higher fuel prices, which are expected to raise CPI inflation until the second half of 2019. From 2020 onwards, we expect that inflation will increase to around 2 percent as capacity pressure builds.

Most estimates of core (underlying) inflation remain below 2 percent, but have been rising since the start of 2018 (figure 4.2).1 These estimates filter out temporary volatility in price movements (such as recent sharp rises in petrol prices) to estimate the underlying trend in inflation.Higher core inflation signals an increase in domestic inflationary pressure.

Higher core inflation is consistent with the tightening in the labour market observed over the past year. It is also consistent with our assumption that the restraining effect of firms’ backward-looking price-setting behaviour (where past sustained low headline inflation has dampened price setting) will gradually diminish. Rising cost pressure has coincided with more

1 CPI inflation excluding food and energy remains low compared to other measures of core inflation. This measure is expected to rebound in the coming year as the impact of fees-free tertiary education for first-year students drops out of annual calculations.

Chapter 4Prices and costs

• CPI inflation has been temporarily boosted by higher fuel prices. Annual CPI inflation increased to 1.9 percent in the September 2018 quarter, and is expected to temporarily rise above 2 percent in 2019.

• Most measures of core inflation remain below 2 percent, but have increased over the past year. Firms are starting to raise prices at a faster rate as cost pressures increase.

• Over the medium term, increasing capacity pressure is expected to lift underlying inflation to the 2 percent target mid-point.


firms increasing prices in recent quarters according to the QSBO (figure 4.3).

We project that annual CPI inflation will rise to 2 percent in the December 2018 quarter, but drop back below 2 percent in 2019 when the recent increase in fuel prices drops out of the annual calculation. Annual CPI inflation returns to around 2 percent over 2020, supported by higher non-tradables inflation as capacity pressure gradually increases.

Surveyed inflation expectations remain consistent with medium-term annual inflation of around 2 percent. Inflation expectations remain close to 2 percent across all horizons (figure 4.4).

2002 2005 2008 2011 2014 2017 2020 0

1

2

3

4

5

6

0

1

2

3

4

5

6% %

Projection

NovMPS

AugMPS

Figure 4.1CPI inflation

(annual)


2002 2005 2008 2011 2014 2017 0

1

2

3

4

5

0

1

2

3

4

5% %

Trimmedmean (30%)

Weightedmedian

Sectoralfactormodel Factor

model

Ex-foodand energy

Figure 4.2Core inflation measures(annual, excluding GST)


2002 2005 2008 2011 2014 2017 -20

-10

0

10

20

30

40

50

60

70

-20

-10

0

10

20

30

40

50

60

70Net % Net %

Costs

Selling prices

Figure 4.3Firms’ costs and selling prices

(s.a.)

Source: NZIER.

Note: These measures show the net percentage of firms that reported an increase in costs or selling prices over the past three months.


Imported inflation and world prices

Tradables inflation has been higher since the start of 2017, following an extended period of falling prices (figure 4.5). Ongoing global growth has absorbed spare capacity worldwide. This has placed upward pressure on imported inflation, which nonetheless remains low in absolute terms (see chapter 5). A rise in oil prices has been an important driver of higher import prices over the past year (figure 4.6).

With global inflationary pressure rising, and some central banks reducing monetary stimulus, the New Zealand TWI has depreciated since the start of 2017 (figure 4.7). This depreciation has raised import prices in New Zealand dollar terms.

While fuel prices have increased, ex-fuel tradables inflation has been negative so far over 2018 and is projected to remain subdued in the near term. Below-average food price inflation and the lagged impact of the previously high New Zealand dollar continue to constrain ex-fuel tradables inflation.

Over the medium term, the lagged impact of recent declines in the New Zealand dollar is also expected to support tradables inflation. Announced increases in national fuel excise duty are expected to lift fuel prices and tradables inflation over the next three years. Tradables inflation settles at around 0.7 percent by the end of the projection, slightly below its historical average.

One of the key risks to the outlook for tradables inflation is that if oil prices do not decline as assumed, fuel prices would contribute more

2002 2005 2008 2011 2014 2017 0

1

2

3

4

5

0

1

2

3

4

5% %

1-year

10-year2-year

Figure 4.4Inflation expectations

(annual)


Note: Inflation expectation measures are estimates drawn at each time horizon from the RBNZ inflation expectations curve, based on surveys of businesses and professional forecasters.

2002 2005 2008 2011 2014 2017 2020 -6

-4

-2

0

2

4

6

8% %

Projection

Fuel priceinflation (RHS)

Tradablesinflation

Tradablesinflation (ex-fuel)

-30

-20

-10

0

10

20

30

40

Figure 4.5Tradables inflation

(annual)



to tradables inflation over the projection. The New Zealand dollar may also continue to depreciate, increasing the cost of imports more than expected.

Domestic inflation and wages

Non-tradables inflation has remained relatively low by historical standards over recent years (figure 4.8). Low levels of non-tradables inflation have partially reflected firms’ subdued price-setting behaviour. Firms appear to have been influenced by past low headline inflation when making pricing decisions in recent years. Domestically-generated inflation has also been held down by the slow reduction in spare capacity in the economy following the Global Financial Crisis. 2002 2005 2008 2011 2014 2017 2020

20

40

60

80

100

120

20

40

60

80

100

120USD/barrel USD/barrel

Projection

Aug MPS

Nov MPS

Figure 4.6Dubai oil prices

(s.a.)

Source: Reuters, RBNZ estimates.

2002 2005 2008 2011 2014 2017 2020 50

55

60

65

70

75

80

85

50

55

60

65

70

75

80

85Index Index

Projection

Aug MPS

Nov MPS

Figure 4.7New Zealand dollar TWI


2002 2005 2008 2011 2014 2017 2020 1

2

3

4

5

6

1

2

3

4

5

6% %

Projection

NovMPS

AugMPS

Figure 4.8Non-tradables inflation

(annual)


Note: The dashed line represents the post-2000 average of realised annual non-tradables inflation.


Recently there have been some signs that upward pressure on non-tradables inflation is beginning to build. Wage inflation has increased, boosted by factors such as the pay equity settlement and minimum wage increase (figure 4.9). Wage expectations have also increased over recent quarters, consistent with our assessment that employment is near its maximum sustainable level (see chapter 3). Wage growth is expected to increase as the labour market tightens and higher headline inflation affects wage negotiations. Our forecasts also incorporate the minimum wage increases announced by the Government.

Business surveys suggest that firms are looking to increase prices as cost pressures intensify. However, in some instances firms’ input costs are increasing faster than output prices, putting downward pressure on margins.

The dampening impact of the Government’s fees-free policy for first year tertiary students on non-tradables inflation will unwind in 2019. This policy is estimated to have reduced non-tradables inflation by approximately 0.3 percentage points over 2018.

Non-tradables inflation is expected to increase over the medium term as capacity pressure in the economy builds. The dampening effect of previous low inflation on price setting is also expected to continue to fade.

The risks to the non-tradables inflation outlook are to the upside. Firms may increase prices faster if domestic labour and import costs (including fuel) increase faster than anticipated, and margins erode further. In addition, firms may pass on wage increases to consumer prices to a greater extent than anticipated. Firms’ price-setting may also become less influenced by the subdued levels of inflation seen over recent years. Conversely, non-tradables inflation and capacity pressure might increase more slowly than anticipated if downside risks to the growth outlook were to materialise.

2002 2005 2008 2011 2014 2017 2020 1.0

1.5

2.0

2.5

3.0

3.5

4.0

1.0

1.5

2.0

2.5

3.0

3.5

4.0% %

Projection

Expected wage growth

Labour Cost Index(private)

Figure 4.9Wage inflation and expectations

(annual)

Source: Stats NZ, RBNZ survey of expectations, RBNZ estimates.

Note: Dashed lines represent the 20-year average of respective data series.


Global growth remains strong

Economic growth in 2018 has remained solid in many of New Zealand’s trading partners (figure 5.1). However, the solid average masks divergent growth outcomes in many economies. Growth in the United States has been strong, reflecting significant fiscal stimulus and buoyant consumer spending. Growth in Europe has weakened in recent quarters. However, growth is expected to moderate across many economies. The International Monetary Fund (IMF) has lowered its projections for global growth as some key downside risks have started to crystallise, which aligns with our projections.

Increasing inflationary pressure in some major economies has resulted in their central banks starting to tighten monetary policy. Unemployment rates have been falling significantly in many economies, and in some cases wage pressures are starting to emerge (figure 5.2).

The outlook for growth in Asian economies has worsened in recent months. The removal of monetary stimulus by the Federal Reserve and the resulting appreciation of the US dollar have seen financial conditions

• Global growth remains strong, but is expected to slow over 2019. Financial conditions have tightened in many countries, trade tariffs have been imposed, and political uncertainty remains high.

• Domestic financial conditions have eased over the past year, reflected in lower wholesale and retail interest rates, and a depreciation in the New Zealand dollar exchange rate.

• The balance of risks to the global economic outlook remains to the downside.

Chapter 5International and financial markets developments


tighten in Asia (figure 5.3). Capital has flowed out of Asia, attracted by the higher interest rates in the United States. Central banks in several Asian economies have raised their policy rates in an effort to stem the depreciation of their currencies. An important exception is China, where the People’s Bank of China has eased its policy settings in recent months.

Downside risks have increased

Global trade policies have become more protectionist this year. In addition to the ongoing withdrawal of monetary policy stimulus in some advanced economies, this has concerned market participants. Recent market volatility has highlighted the risk that financial conditions

2002 2005 2008 2011 2014 2017 2020 -3

-2

-1

0

1

2

3

4

5

6

-3

-2

-1

0

1

2

3

4

5

6% %

Projection

Figure 5.1Trading-partner GDP growth

(annual)

Source: Haver Analytics, Stats NZ, RBNZ estimates.

2002 2005 2008 2011 2014 2017 0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14% %

Australia

Euro area

Japan

United States

Figure 5.2Unemployment rates

(s.a.)

Source: Bloomberg.

2013 2014 2015 2016 2017 2018-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3Index Index

Asia ex. Japan

United States

Euro area

Tighter financialconditions

Easier financialconditions

Aug MPS

Figure 5.3Financial conditions indices

Source: Bloomberg, RBNZ estimates.

Note: Indices are constructed from a combination of money and bond market spreads, equity market valuations, and – in the case of Asia excluding Japan – a capital flow proxy.


could tighten suddenly in advanced economies. Credit spreads have widened and equity prices have fallen sharply (figure 5.4). In some cases government bond yields have increased.

The United States has imposed tariffs on imports of steel and aluminium, and on around half of its imports from China. China and other affected trading partners have retaliated with tariffs on US goods.

Tariffs imposed so far have almost doubled the effective US tariff rate (gross duties as a share of total imports), taking it above the level of other advanced economies. If further proposed changes to tariffs were implemented, the US effective tariff rate could rise to its highest level in 50 years.

However, some trade tensions have recently receded. For example, the United States, Mexico, and Canada have reached a new trading agreement, the US-Mexico-Canada Agreement (USMCA), which will replace the North American Free Trade Agreement (NAFTA).

The IMF estimates that the combination of tariffs already imposed and those that have been threatened would reduce US GDP by around 1 percent, and Chinese and world GDP by around 0.5 percent each in the long term.1 In this scenario, the IMF estimates that the impact on New Zealand GDP would peak at around -0.3 percent, but would be negligible in the long term.

Domestic financial conditions

Financial conditions in New Zealand have eased over 2018 even as the OCR remained at 1.75 percent. Wholesale interest rates are lower, mortgage rates have fallen, and the exchange rate has depreciated.

Wholesale interest rates have declined since the start of the year, particularly at longer maturities. This partly reflects reductions in the implied future path for the OCR based on market pricing. For example, the benchmark wholesale interest rates we monitor, domestic swap rates, have declined over 2018, in contrast to the international experience (figure 5.5). Swap rates have been stable in Australia and have risen significantly in the United States as the Federal Reserve has continued to raise its policy rate.

Domestic swap rates are an important determinant of banks’ funding costs. The recent declines in swap rates have contributed to lower fixed-

1 See International Monetary Fund (2018), World Economic Outlook, Scenario Box 1: Global Trade Tensions, IMF, pp. 33-35 (October), and International Monetary Fund (2018), Regional Economic Outlook,AsiaandPacific, IMF (October).

17Q1 17Q2 17Q3 17Q4 18Q1 18Q2 18Q395

100

105

110

115

120

125

130

135

95

100

105

110

115

120

125

130

135Index Index

Australia

Euro area

Japan

United States

Figure 5.4Equity indices

Source: Bloomberg.

Note: The equity indices have been indexed to 100 at 1 January 2017.

https://www.imf.org/en/Publications/WEO/Issues/2018/09/24/world-economic-outlook-october-2018

https://www.imf.org/en/Publications/WEO/Issues/2018/09/24/world-economic-outlook-october-2018


term mortgage rates in New Zealand (figure 5.6). Mortgage rates have declined most at longer maturities.

Depreciation of the New Zealand dollar over 2018 has also contributed to easier financial conditions. The New Zealand dollar TWI is around 3 percent lower than its January 2018 level, and around 10 percent lower than its peak in 2017 (figure 5.7). Much of this depreciation reflects differences in the expected stance of monetary policy in New Zealand relative to the rest of the world. Implied expectations for the OCR based on market pricing have declined, while at the same time major central banks overseas have continued to unwind their stimulatory monetary policy settings.

2013 2014 2015 2016 2017 20184

5

6

7

8

4

5

6

7

8% %

Floating

1-year

2-year

3-year

5-year

Figure 5.6Mortgage rates

Source: interest.co.nz, RBNZ estimates.

Note: The rate shown for each term is the average of the latest rate on offer from ANZ, ASB, BNZ, and Westpac.

Figure 5.5 Swap rates by maturity

1y 5y 10y 1y 5y 10y 1y 5y 10y1.6

2.0

2.4

2.8

3.2

3.6

1.6

2.0

2.4

2.8

3.2

3.6% %

New Zealand Australia United States

Current

1 Jan 2018

Source: Bloomberg.

2010 2012 2014 2016 201860

65

70

75

80

85

60

65

70

75

80

85Index Index

Figure 5.7New Zealand dollar TWI

Source: Bloomberg.


Chapter 6Statistical appendix

6.1 Key forecast variables 36

6.2 Measures of inflation, inflation expectations, and asset prices 37

6.3 Measures of labour market conditions 38

6.4 Composition of real GDP growth 39

6.5 Summary of economic projections 40


GDP growth CPI inflation CPI inflation TWI OCRQuarterly Quarterly Annual

2016 Mar 1.2 0.2 0.4 72.2 2.4 Jun 1.0 0.4 0.4 73.6 2.3 Sep 0.8 0.3 0.4 77.0 2.1 Dec 0.4 0.4 1.3 77.6 1.92017 Mar 0.8 1.0 2.2 77.9 1.8 Jun 0.8 0.0 1.7 76.5 1.8 Sep 0.6 0.5 1.9 77.1 1.8 Dec 0.6 0.1 1.6 73.8 1.82018 Mar 0.5 0.5 1.1 74.9 1.8 Jun 1.0 0.4 1.5 73.7 1.8 Sep 0.7 0.9 1.9 72.4 1.8 Dec 0.5 0.2 2.0 72.0 1.82019 Mar 0.8 0.6 2.1 72.0 1.8 Jun 0.9 0.4 2.1 72.0 1.8 Sep 0.9 0.6 1.8 72.0 1.8 Dec 0.8 0.3 1.9 72.0 1.82020 Mar 0.8 0.6 1.8 72.0 1.8 Jun 0.8 0.6 2.0 71.9 1.8 Sep 0.8 0.6 2.0 71.9 1.9 Dec 0.7 0.4 2.1 71.9 2.02021 Mar 0.7 0.7 2.2 71.9 2.1

Jun 0.6 0.6 2.2 71.9 2.2Sep 0.6 0.6 2.3 71.8 2.3Dec 0.5 0.3 2.2 71.8 2.4

Table 6.1 Key forecast variables


2017 2018Mar Jun Sep Dec Mar Jun Sep Dec

Inflation (annual rates)CPI 2.2 1.7 1.9 1.6 1.1 1.5 1.9CPI non-tradables 2.5 2.4 2.6 2.5 2.3 2.5 2.6CPI tradables 1.6 0.9 1.0 0.5 -0.4 0.1 0.8Sectoral factor model estimate of core inflation 1.4 1.4 1.4 1.5 1.6 1.7 1.7CPI trimmed mean (30 percent) 2.1 1.9 2.1 1.8 1.7 1.8 1.8CPI weighted median 2.2 2.0 2.0 2.0 2.2 2.3 2.2GDP deflator (expenditure) 3.8 3.0 3.6 3.2 1.3 1.9

Inflation expectationsANZ Business Outlook - inflation one year ahead (quarterly average to date)

1.8 2.0 1.9 2.2 2.1 2.2 2.2

RBNZ Survey of Expectations - inflation two years ahead 1.9 2.2 2.1 2.0 2.1 2.0 2.0 2.0RBNZ Survey of Expectations - inflation five years ahead 2.1 2.1 2.1 2.1 2.2 2.1RBNZ Survey of Expectations - inflation 10 years ahead 2.1 2.0 2.1 2.2 2.1 2.2Long-run inflation expectations1 2.0 2.0 2.0 2.1 2.0 2.1 2.1 2.1

Asset prices (annual percent changes)Quarterly house price index (CoreLogic NZ) 10.9 5.4 3.4 6.2REINZ Farm Price Index (quarterly average to date) 4.5 5.2 9.5 9.7 2.6 3.8 5.6NZX 50 (quarterly average to date) 12.8 7.6 6.6 17.5 17.5 16.8 17.3 9.4

Table 6.2 Measures of inflation, inflation expectations, and asset prices

1 Long-run expectations are extracted from a range of surveys using a Nelson-Siegel model. Source: ANZ Bank, Aon Consulting, Consensus Economics, RBNZ estimates.


2017 2018Mar Jun Sep Dec Mar Jun Sep

Household Labour Force SurveyUnemployment rate 4.9 4.8 4.6 4.5 4.4 4.5Underutilisation rate 12.2 11.9 12.0 12.2 11.9 12.0Labour force participation rate 70.6 70.1 71.1 70.9 70.8 70.9Employment rate (percentage of working-age population) 67.2 66.7 67.8 67.7 67.7 67.7Employment growth 5.7 3.1 4.1 3.7 3.1 3.7Average weekly hours worked 33.3 33.7 33.9 33.6 33.9 34.2Number unemployed (thousand people) 131 127 126 122 120 124Number employed (million people) 2.54 2.54 2.59 2.60 2.62 2.63Labour force (million people) 2.67 2.66 2.72 2.73 2.74 2.75Extended labour force (million people) 2.77 2.76 2.82 2.82 2.84 2.86Working-age population (million people) 3.78 3.80 3.82 3.84 3.87 3.89

Quarterly Employment SurveyFilled jobs growth 2.5 3.0 2.5 1.8 1.2 1.2Average hourly earnings growth (private sector, ordinary time) 1.1 1.1 2.0 3.1 3.9 3.3

Other data sourcesLabour cost index growth, private sector 1.5 1.6 1.9 1.9 1.9 2.1Labour cost index growth, private sector, unadjusted 2.9 3.1 3.6 3.6 3.5 3.5Net permanent and long-term working-age immigration (quarterly, thousand people)

15.4 15.9 13.6 14.2 13.7 13.0 11.9

Change in All Vacancies Index 13.6 10.0 6.9 6.1 6.6 7.5 8.4

Table 6.3 Measures of labour market conditions (seasonally adjusted, changes expressed in annual percent terms)

Note: The All Vacancies Index is produced by MBIE as part of the Jobs Online report, which shows changes in job vacancies advertised by businesses on three internet job boards. The unadjusted labour cost index (LCI) is an analytical index which reflects quality change in addition to price change (whereas the official LCI measures price changes only). For definitions of underutilisation, the extended labour force, and related concepts, see Statistics New Zealand (2016), Introducing underutilisation in the labour market.


Actuals ProjectionsMarch year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Final consumption expenditurePrivate 2.3 3.2 2.3 3.8 3.2 3.9 5.1 3.8 3.0 2.7 2.6Public authority 1.9 1.7 -0.2 2.1 3.2 2.5 1.9 4.8 3.6 1.0 1.5

Total 2.2 2.9 1.7 3.4 3.2 3.6 4.3 4.0 3.2 2.3 2.3

Gross fixed capital formationResidential 1.7 3.0 17.6 15.1 8.2 7.6 9.5 0.5 2.7 4.3 5.0Other 4.3 6.9 1.6 8.1 8.2 3.8 4.2 5.0 3.5 3.5 4.9

Total 3.7 6.0 5.0 9.8 8.2 4.7 5.6 3.8 3.3 3.7 4.9

Final domestic expenditure 2.5 3.5 2.4 4.7 4.3 3.8 4.6 4.0 3.2 2.6 3.0

Stockbuilding1 0.7 0.3 -0.3 -0.2 0.5 -0.3 -0.1 -0.1 0.1 0.0 0.0Gross national expenditure 3.3 4.0 2.0 4.5 4.5 3.3 4.6 4.2 3.3 2.5 3.0

Exports of goods and services 2.8 2.3 3.1 0.1 4.6 6.1 1.4 2.9 4.3 3.3 2.8Imports of goods and services 11.4 6.7 1.3 8.1 7.4 2.2 5.1 7.2 5.2 1.3 2.3

Expenditure on GDP 1.0 2.7 2.5 2.1 3.6 4.5 3.5 2.8 3.0 3.2 3.2

GDP (production) 1.6 2.3 2.2 2.6 3.7 3.6 3.7 2.7 2.8 3.2 3.2GDP (production, March qtr to March qtr) 1.2 3.0 1.8 3.2 3.7 4.0 3.0 2.6 3.0 3.4 3.0

Table 6.4 Composition of real GDP growth (annual average percent change, seasonally adjusted, unless specified otherwise)

1 Percentage point contribution to the growth rate of GDP.


Actuals ProjectionsMarch year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021Price measures

CPI 4.5 1.6 0.9 1.5 0.3 0.4 2.2 1.1 2.1 1.8 2.2Labour costs 2.0 2.1 1.8 1.7 1.8 1.8 1.5 1.9 2.2 2.3 2.5Export prices (in New Zealand dollars) 7.9 -2.7 -4.8 11.5 -9.1 -0.3 3.9 3.4 4.2 -0.0 1.2Import prices (in New Zealand dollars) 3.4 -1.7 -4.0 -3.1 -3.4 1.2 0.6 1.9 5.1 0.5 0.6

Monetary conditionsOCR (year average) 2.8 2.5 2.5 2.5 3.4 2.9 2.0 1.8 1.8 1.8 1.9TWI (year average) 69.0 72.2 74.0 77.6 79.3 72.6 76.5 75.6 72.5 72.0 71.9

OutputGDP (production, annual average % change) 1.6 2.3 2.2 2.6 3.7 3.6 3.7 2.7 2.8 3.2 3.2Potential output (annual average % change) 1.5 1.7 2.1 2.5 2.9 3.0 3.2 3.1 3.0 2.9 2.8Output gap (% of potential GDP, year average) -2.2 -1.6 -1.5 -1.4 -0.6 -0.0 0.5 0.1 -0.0 0.3 0.6

Labour marketTotal employment (seasonally adjusted) 1.6 0.6 0.2 3.7 3.2 2.0 5.7 3.1 2.0 1.8 1.6Unemployment rate (March qtr, seasonally adjusted) 6.0 6.3 5.7 5.6 5.5 5.2 4.9 4.4 4.4 4.2 4.1Trend labour productivity 1.1 1.0 0.8 0.5 0.2 -0.1 -0.2 -0.0 0.4 0.8 1.2

Key balancesGovernment operating balance (% of GDP, year to June) -8.9 -4.3 -2.0 -1.2 0.2 0.7 1.5 1.9 0.9 1.4 1.5Current account balance (% of GDP) -2.8 -3.2 -3.7 -2.5 -3.5 -2.6 -2.6 -3.1 -3.6 -3.2 -3.0Terms of trade (SNA measure, annual average % change) 7.9 1.6 -4.3 11.7 -0.3 -3.0 2.7 4.7 -1.9 -1.4 0.4Household saving rate (% of disposable income) 2.1 2.4 0.5 0.1 -1.5 -1.3 -2.8 -2.9 -2.4 -1.6 -0.2

World economyTrading-partner GDP (annual average % change) 4.4 3.4 3.3 3.5 3.7 3.4 3.3 3.8 3.8 3.5 3.2Trading-partner CPI (TWI weighted) 3.2 2.7 2.3 2.3 1.0 1.2 1.9 1.9 2.1 2.1 2.2

Table 6.5 Summary of economic projections (annual percent change, unless specified otherwise)

Monetary Policy Statement · i RESERE BANK F NE ZEALAN / MONETA POLIC STATEMENT, NEMBER 2018...

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