China dependence, housing pose biggest economic threats – IMF

A sharp slowdown in the Chinese economy is the biggest external threat to the New Zealand economy, the IMF says in its annual checkup.

This would cause a drop in the terms of trade but also have the benefit of bringing down the dollar, which the IMF considers overvalued.

“Although an orderly exit by other advanced economies from unconventional monetary policy could have the welcome effect of weakening the exchange rate, a bumpy exit and repeated episodes of financial market volatility could lead to widespread contagion and raise the cost of New Zealand banks’ offshore borrowing,” the IMF says in what is called the Article IV consultation.

"About two thirds of New Zealand’s exports of goods go to China, Australia, and other parts of Asia. As such, any adverse development in the region would have a substantial impact on New Zealand’s terms of trade."

The findings were presented to government ministers, officials, the Reserve Bank, business organisations and unions in Wellington yesterday.

The assessment shows only a few warning signals in an otherwise buoyant economy underpinned by a sound macroeconomic framework.

The IMF predicts 3.5% growth this year, driven by “supportive financial conditions, historically high commodity prices, resurgent construction activity related to the Canterbury post-earthquake rebuild and general housing shortages and a substantial increase in net immigration.”

House prices "appear elevated" on historical and international comparisons and most measures of affordability.

“With house price inflation running high, there remains the risk that expectations-driven, self-reinforcing demand dynamics and price overshooting could take hold.”

The IMF praises efforts by the government and the Reserve Bank to help alleviate supply bottlenecks and tighten standards for mortgage lending. and says an increase in mortgage rates should help ease price pressures.

But it warns a sudden price correction – “possibly triggered by a shock to household incomes or borrowing costs” – could reduce consumer confidence, impact overall economic activity and hurt banks’ balance sheets.