Economic Outlook for New Zealand

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Presentation transcript:

Economic Outlook for New Zealand September 2019 Disclaimer: This presentation is strictly for training purposes.

Summary of key messages

Headline CPI inflation is below objective of 2%…

… driven by weak tradable inflation … driven by weak tradable inflation. Non-tradable provides some basic support.

…but no acceleration in sight…

… as declining import prices keep holding tradable inflation back.

At the same time, weak aggregate demand is further undermined by negative demand shocks (such as…) and weakening global growth.

Money and Forex market conditions are accommodative -- with negative interest rates and undervalued kiwi

Accommodative stance of interest rate policy…

… is looser then predicted by a policy rule, providing extra cushion.

The US FOMC continued a loosening cycle…

… as aggregate demand stagnates…

… and inflating is back in the lower half of target band again.

Baseline forecast External sector assumptions Key judgements Forecast

External sector assumptions 2020 2021 2022 US Gross domestic product (%) 1.2 1.4 1.3 US Consumer price index (%) 1.8 1.6 1.7 US Federal funds rate (%) 2 BRENT (USD/barrel) 72 Source: Deloitte Insights, US Economic forecast, 3 quarter 2019

OCR commitment: 1% through 2020:Q4 Key judgements Constrained exchange rate appreciation - at 1% p.a. through 2022; a slower pace than necessary to close a real exchange rate gap over the same time OCR commitment: 1% through 2020:Q4

Summary of baseline forecast

Alternatives and risk assessment

Mild fiscal stimulus of 1% of GDP over the 2020/2021 fiscal year. Considered scenarios Mild fiscal stimulus of 1% of GDP over the 2020/2021 fiscal year. US economic growth lower than expected ( by 0.1 ppt) US enters deep recession (output gap -2% in 2021) Unconventional policy response: OCR commitment extended through 2022 Exchange rate commitment: NZD/USD 0.65 (or weaker) through 2022

Fiscal stimulus

Global recession

Unconventional policy response to global recession: FOREX commitment: NZD/USD 0.65 (or weaker)

Summary of risk assessment

Recommendations for policy strategy

Annex

… as declining import prices hold tradable inflation back.