New Zealand: Selected Issues

May2024 NEWZEALAND SELECTEDISSUES IMFCountryReportNo.24/123 ThispaperonNewZealandwaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonApril24,2024. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.org InternationalMonetaryFundWashington,D.C. ©2024InternationalMonetaryFund April23,2024 NEWZEALAND SELECTEDISSUES PreparedByJohnSprayandNourTawk ApprovedBy AsiaandPacificDepartment CONTENTS INFLATIONINNEWZEALAND:DRIVERSANDDYNAMICS3 A.Introduction3 B.IdentifyingtheDriversandPersistenceofPandemicEraInflation5 C.TheImpactofMigrationonInflationandtheMacroeconomy10 D.Conclusions18References24 FIGURES 1.CPIandPPIInflation3 2.MonetaryStimulus6 3.FiscalStimulus6 4.CommodityPricesandTransportCosts7 5.LockdownIntensityandSectoralVariation7 6.HeadlineInflationResults9 7.ImpulseResponseFunctionsfromSupplyandDemandShocks10 8.Foreign-BornShareofthePopulation,201611 9.NetMigrationTrends11 10.MigrantCharacteristics13 11.AverageSizeofImmigrationShock,PerCountry14 12.EffectsofMigrationonSupplySideVariables16 13.EffectsofMigrationonDemandSideVariables17 14.NetEffectsofMigrationonOutputandInflation17 15.NetEffectsofMigrationonOutputandInflationwhenTightLaborMarket18 ANNEX I.Robustness20 NEWZEALAND MITIGATIONOPTIONSTOMEETNEWZEALAND'SCLIMATEGOALS25 BOX 1.DifferencesBetweenEmissionsEstimatesbyCPATandNewZealand’sMinistryfor theEnvironmentModelling28 2INTERNATIONALMONETARYFUND INFLATIONINNEWZEALAND:DRIVERSANDDYNAMICS1 ThispaperinvestigateswhyNewZealand’sinflationishigherandfurtherfromtargetthancomparatoreconomiesconsideringtwomainhypotheses:(1)thepersistenceofpandemicerashocks;and(2)strongmigrationinflowsfuelingdemand.Thepaperfindsthat,likeinmanyadvancedeconomies,expansionaryfiscalandmonetarypolicy,highglobalcommodityprices,exchangerates,andhighmaritimetransportcostsallfedintohigherinflation.However,uniqueforNewZealand,thedelayedreopeningoftheeconomylikelycausedapostponeddemandshockrelativetosimilareconomies. Resultsshowthattheimpactoftheseshocksdecayrapidlyovertime,suggestingpositiveshort-terminflationdynamics.Withaneyeforwhatliesahead,thepaperfindsthatlargemigrationwavesareassociatedwithshort-runincreasesininflation,butthattheseeffectsarerelativelymodestandnolongersignificantafterfouryears.Instead,thelong-rundynamicsshowevidencethatmigrationcanleadtosignificantlong-termgainstoproductivity,output,andcapitalgrowth.Countrieswithtightlabormarketsexhibitsimilarpatternstothosewithout,excepttheinflationaryeffectsofmigrationdissipatefaster. A.Introduction 1.InflationinNewZealandishigherandfurtherfromtargetthanpeersinadvancedeconomiesandtheAsia-Pacificregion.NewZealand’sheadlineinflationreached4.7percentyoyinDecember2023downfromapeakof7.3percentin2022Q2,butstillfarabovetheinflationtargetbandof1to3percent.Whileotheradvancedeconomieshadhigherpeakinflation,NewZealand’strajectoryhaslaggedbehinditspeers.Forinstance,manyAsianeconomiesarenowexperiencinginflationlevelsbelowtargetand,insomecases,evendeflation. Figure1.CPIandPPIInflation A.CPIInflationinSelectedAdvancedEconomies (Annualpercentchange,3mma) B.PPIInflationinSelectedSectors (Annualpercentchange,3mma) Sources:ConsensusForecasts;IMFWEOdatabase;Haver;andIMFstaffcalculations. 1PreparedbyJohnSprayandNourTawk. INTERNATIONALMONETARYFUND3 2.Thecostofproductionalsoremainselevatedasdemonstratedbyhighproducerpriceinflationwhichisalsobroadbased.PartofthecauseofrisingCPIinflationwashigherglobalcosts,asthepandemiccausedshutdowns,transportcostsrose,andregionalconflictsdisruptedsupply-chains.Asanintegratedplayeringlobalsupply-chains,NewZealandalsoexperiencedhighPPIinflationwhichbecamebroad-basedacrosssectors. 3.ThedriversofboththeriseandpersistenceininflationhavecreatedmuchdiscussiongloballyandinNewZealandbutidentifyingthecausalimpactcreatesanempiricalchallenge.RBNZChiefEconomistPaulConwaysaidinaMarch2023speech“TheCOVID-19pandemicandwarandrelatedeventsreducedtheabilityoftheglobaleconomytoproducegoodsandservices.Globalsupplychainswereseverelydisrupted,especiallyforuslivinghereintheSouthPacific…resilientdemandatatimeofdisruptedandlimitedsupplycausesinflation.”2Atthesametime,NewZealandexperiencedlargedomesticshocksincludingrapidshiftsinmonetarypolicy,fiscalexpansion,aswellasrecordlevelsofinwardmigration.RBNZestimatessuggestalmosthalfofheadlineinflationoverthepandemicoriginatedoffshore,andTreasurystaffhaveestimatedthatinflationwasdrivenapproximatelyhalfbysupply-sidedriversandhalfbydemand-sidedrivers.3EarlierIMFstaffanalysisalsosuggeststhatthepost-pandemicsurgeininflationwasdrivenbybothglobalanddomesticfactors,andglobalfactors,suchassupplydisruptions,playedalargerrole.4Inordertoidentifythecausalimpactofeachoftheseconcurrentshocksrequiresarichempiricalmodelwhichincorporatesglobalproductionpricesacrossmajoreconomiesaswellasg