Economic pass mark by IMF, plus premonitions

The International Monetary Fund is giving the New Zealand economy a pass mark, with some warnings about problems the country may face in the future.

A sharp slowdown in China's growth, financial market volatility, a sustained decline in commodity prices and a drop in house prices are the biggest potential risks facing the New Zealand economy, according to the IMF assessment.

The global body of 188 member countries, set up to foster international monetary co-operation, expects the New Zealand economy to expand 3.5% this year before moderating to a trend rate of 2.5% over the medium term.

The nation's terms of trade will continue to boost growth in national income while moderating from near-record levels, given a decline in global dairy prices.

Strong construction activity, driven by the rebuild of Christchurch and more broadly a shortage of housing, was expected to remain an important driver for near-term growth, the IMF said.

Finance Minister Bill English took heart from the report, saying it was the latest in a series of encouraging reports on the New Zealand economy, confirming the country was well placed compared with most other developed countries.

''The IMF highlights the importance of getting the Government's books back to surplus to help the Reserve Bank keep interest rates lower for longer.

''Under the previous government, excessive spending, alongside the booming housing market, contributed to floating mortgage rates reaching almost 11%,'' he said.

The IMF expected New Zealand's current account deficit to increase to about 6% of GDP by 2016, still well below the levels seen in the mid-2000s.

Although the longstanding imbalance remained a vulnerability for the economy, the latest figures were encouraging, with Statistics New Zealand showing the current account deficit at 3.4% of GDP, Mr English said.

The report included a risk assessment matrix for New Zealand which rates a probability and impact of key risks.

A sharp slowdown in growth in China was rated a low-medium likelihood, which would have a medium impact on the economy, affecting New Zealand directly through the terms of trade and indirectly through the impact on Australia, New Zealand's second-largest market.

It noted New Zealand's flexible exchange rate would provide something of a buffer.

A surge in global financial market volatility was regarded as a high risk which could be triggered by a disorderly exit by the United States Federal Reserve and other major central banks from unconventional monetary policies.

That could have a medium impact on New Zealand, driving up offshore wholesale borrowing costs, the IMF said.

A sustained decline in commodity prices was deemed a medium risk but with a high impact on the economy, given the nation's dependence on commodity exports, though with the exchange rate providing a buffer.

A sharp fall in house prices was cited as the biggest potential domestic risk, with a medium likelihood and a medium-to-high impact on the economy.

- Additional reporting BusinessDesk

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