The International Monetary Fund (IMF) has recently published its latest report on the New Zealand economy.
The IMF does these reviews on their member countries about every 18 months. The report was not very flattering. One important conclusion was that New Zealand’s large current account deficit, which is currently 8.5 per cent of gross domestic product, showed clearly that New Zealand was living beyond its means. The IMF also expected the economy to slow further and possibly fall into recession.
It also said that the slowing housing market and rising interest rates were leading to a worrying rise in the level of debt arrears. However, despite the slowing housing market, New Zealand still had a major problem with housing affordability. In relation to average incomes, New Zealand had some of the least affordable housing in the world. Unfortunately, the IMF report was coy, or you could say disingenuous, when they wrote about the solution to this major problem.
They said, “achieving long-term affordability depends critically on freeing up land supply, improving planning and zoning, and fostering infrastructure investment to enable fast-track housing developments and reduce construction costs and delays”.
This is all true but it gives the impression that solving the housing affordability problem through these supply-side policies will be costless. There are only two ways to improve housing affordability: house prices have to fall or average incomes have to rise. The supply-side policies promoted by the IMF will only improve affordability if the increased supply brings down average prices.
One other statement in the report that surprised me was that “the management of the pandemic had been exemplary”. Some commentators thought the IMF were complementing the economic management of the pandemic. I am not sure that they were. But if they were, they are even more out of touch than I thought they were about this period. The Reserve Bank, and most other Central Banks around the world, lowered interest rates to ridiculously levels and created huge amounts of liquidity.
When I first started voting there was a political party called Social Credit. They were treated with scorn by most economists. But what the Reserve Bank and many other Central Banks did recently went even further than the polices Social Credit used to advocate. The amount of liquidity they created was truly staggering. It still amazes me that the IMF was not critical of this enormous amount of cheap liquidity creation when it was a happening.
You have to wait to see the medium-term impacts of this enormous creation of cheap money before you can call it a success or a failure. We are getting towards the medium-term now.
What have been the impacts? inflation is almost three times the Reserve Bank’s target level, we may be heading for a recession, we have a huge current account deficit, we have some of the least affordable housing in the world and we have huge government and household debt levels.
That doesn’t look like a very exemplary set of medium-term impacts to me. Most of these impacts should not be a surprise to the IMF or anyone else. These are the things you should expect to get when you create a mountain of cheap liquidity.
But we can’t blame the IMF for the daunting set of economic problems we now face. New Zealand has never had an IMF economic programme. Our economic policy choices have been our own.