Macro and Micro Economic Situation of New Zealand - Example

Macro and Micro Economic Situation of New Zealand By: Executive summary New Zealand is experiencing growth in its economy. For instance, over the previous quarter of 2014, New Zealand’s Gross Domestic Product expanded by one percent. Statistics from researches indicate that New Zealand’s economy is the fourth most economically free in Asia-Pacific region. The economic freedom and growth in New Zealand’s economy are attributed to various factors. Researches indicate that there are monetary freedom, business freedom, reduction in corruption levels, reduction in general prices, and availability of employment in New Zealand’s economy. The New Zealand government has implemented policies aimed at ensuring competitiveness and transparency in the country’s economy. The paper covers the macro and microeconomics situation in New Zealand. 1. Macro and Microeconomic issues 1.1 Unemployment Unemployment rate is a social indicator. Studying the unemployment rate in New Zealand is important for analysing both the macro and micro economic issues. The study reflects the labour markets and the economic conditions of New Zealand. Statistics indicate that the unemployment rate was at six percent during the first quarter of 2014 (OECD 2013, 100). The rate remained unchanged because, in the fourth quarter of 2013, the interest was still 6 percent. In summary, from 1985 to 2014, New Zealand’s unemployment rate averaged at 6.30 percent. The highest rate was in 1991 when the rate was 11.20 percent, whereas the lowest was 3.50 percent in 2007 (OECD 2013, 100). The employment rate and labour force participation increased by 0.4 percent during the first quarter of 2014 (OECD 2013, 100). Participation in the labour force hit 69.3 percent, while the employment rate rose to 65.1 percent (OECD 2013, 100). The New Zealand government has policies in place to reduce the unemployment rate. Employers have created conditions for good employment and creation of more jobs. Additionally, the majority of employers in New Zealand support their employees to gain more skills. The skills will help them participate in other activities and improve the economy in general (Kaimahi 2014). 1.2 Prices The cost of living in New Zealand is comparable to any developed country worldwide. Businesspeople in New Zealand sell their goods at competitive prices. For example, the cost of imported machinery is similar to the cost in Australia. An international survey ranked New Zealand cities as most affordable to live in (Internation Monetary Fund 2000). All the goods and services in New Zealand have added tax on its prices. The tax is called Goods and Services Tax (GST) (Kaimahi 2014). Currently, the rate of GST is 15 percent. However, the government excluded rents on homes, flats, and apartments from GST. Furthermore, GST does not apply to any financial transactions in New Zealand. Statistics indicate that the majority of people who visit New Zealand find life to be expensive New Zealand’s cities. Economic experts advise that visitors should research on New Zealand’s lifestyle before visiting the country. Some agencies in New Zealand have created websites where people could compare prices of goods. The cost of accommodation, food, vehicle, insurance, mortgage and finance, and utilities are affordable in New Zealand. For those who cannot afford to pay, most business owners in New Zealand accept credit as a form of payment. 1.3 Economy The economy of New Zealand grew by 1 percent in the first quarter of 2014 (OECD 2013). From 1987 to 2014, New Zealand’s GDP grew in the average of 0.61 per year (Kaimahi 2014). The highest growth was in 1999 when the GDP grew by 2.90 percent, and the lowest was -2.90 percent in 1991 (OECD 2013). The construction sector in New Zealand is the largest contributor to the country’s GDP. According to literature reviews, there has been a rise in construction of both residential and non-residential buildings in New Zealand. The manufacturing sector recorded an increase in production, especially the oil sector. The rise is attributed to increase in the production of Methanex, which is a raw material for the manufacture of petroleum, plastic, rubber, and chemical products. The manufacturing activity rose by 5.4 percent. New Zealand’s economy experienced a 6.3 percent growth in its mining activity (The New Zealand Herald 2014). Furthermore, the agricultural department recorded a 1.2 percentage increase in its activities (The New Zealand Herald 2014). There has been a slow spending by majority of New Zealand households. However, the spending by tourists recorded an increase. The tourist spending rose to 7.7percent (The New Zealand Herald 2014). The rise in tourism spending influenced the increase in exports of travel services. The exports of travel services increased the rise in general exports by 3.1 percent (The New Zealand Herald 2014). Currently, New Zealand’s economy is growing at a rate of 3.3 percent (The New Zealand Herald 2014). The central bank of New Zealand has plans to increase the interest rates as a means of reducing inflation. Economists predict a rise in the economy of New Zealand. The largest contributor will still be the construction sector, especially in Canterbury. On the other hand, activities in the accommodation and retail increased by 1.4 percent (The New Zealand Herald 2014). Increase in furniture, electrical, and hardware retailing saw a 0.9 percentage increase in retail trade. 1.4 Balance of Payments The balance of payments indicates a country’s records of the value of transactions it takes compared with other countries. Additionally, it shows a country’s financial claims on, and liabilities to other countries. The seasonally adjusted current account for New Zealand in the first quarter of 2014 was a deficit amounting to $0.6billion (The New Zealand Herald 2014). As the financial year ended in March 2014, the deficit was $6.3 billion (The New Zealand Herald 2014). The deficit was equivalent to 208 percent of New Zealand’s GDP (The New Zealand Herald 2014). The unadjusted current account balance reflected a surplus of $1.4billion in the first quarter of 2014 (MacPherson 2014, 1-4). Economists argue it was the largest dollar surplus in New Zealand’s history. Furthermore, the net international position of New Zealand was $148 billion, which is 65.3 percent of the country’s GDP at the first quarter of 2014. It is $1.1 billion more than the previous year liability position (MacPherson 2014). The above statistics means majority of New Zealanders earn their money from foreign investments. However, the profits from internationally owned New Zealand companies were small. New Zealand could earn more money from international trade, but exports of goods were affected by summer drought. Economists predict an increase of income from international trade. The construction in Canterbury and other parts of New Zealand will demand more imports. Additionally, a strong economic growth will boost the profits of foreign-owned New Zealand companies. From the statistics, it is evident the balance of payment figures indicated the country’s net international liabilities represented more than 80 percent of the country’s GDP. Such case will have effects on employment opportunities and investments. Government officials argue that the country earns less from its exports than what the country spend on imports and interest. The leaders fear the country will lose a lot of money and eventually become indebted. It has forced the leaders to form policies aimed at reducing balance of payments deficits (Mackenzie 2013). 2. Policies 2.1 Monetary policies The New Zealand’s reserve bank relies on monetary policies, to maintain the price stability in the country. An agreement called Policy Targets Agreement requires the reserve bank to keep inflation between one and three percent (The New Zealand Herald 2014). The bank set up the Official Cash Rate in order to implement the monetary policy. The monetary policy has to set out; how the bank proposes to achieve its targets, how the bank formulates and implements the monetary policy in the next five years, and how monetary policy has been implemented. In 2014, the monetary policy statement increased the official cash rate by 25 basis points. The bank project an increase by 200 basis points in the next two years. The bank decided to increase the interest rates. It was a policy meant to reduce the inflation rates. The reserve bank projects an increase of interest rate from 2.7 percent in March 2014, to 3.8 percent in 2014/2015, 4.7 percent in 2015/2016, and 5.2 percent in the first quarter of 2017 (The New Zealand Herald 2014). The bank predicted these interest rates based on trade activities, savings, consumer behaviour, and immigration patterns. The monetary policy statement of New Zealand covers the key policy judgments, financial market developments, the current economic conditions, and the macroeconomic outlook. 2.2 Fiscal policies The New Zealand’s government has fiscal strategy meant to give guidelines on the government’s economic and social objectives. The fiscal policy aims at reducing the total debt at the lowest level. After a reduction in the total debt, the fiscal policy has to maintain the prudent level of total debts. Furthermore, the government should stipulate its fiscal strategy while considering the fiscal risks facing it. The New Zealand government has to formulate a fiscal strategy that connects both the fiscal and monetary policy. Moreover, the fiscal strategy should have a positive impact on all the present and future generations. The New Zealand government has its own fiscal strategy. The government stated clearly its fiscal goals in the fiscal strategy report of 2014. The government wanted to return to surplus in 2014/2015. Additionally, the fiscal strategy wanted to cushion interest rates from changes in fiscal policy setting. Such case will be possible if the government manages its revenue and spending. The government aimed at reducing the net debt. According to New Zealand’s treasury, the country should have a debt of not more than 20percent of the GDP by 2020 (Kissel 2009). Additionally, the government in its fiscal strategy wanted to maintain a net debt within 10 to 20 percent of GDP in a given economic cycle (Kissel 2009). The fiscal strategy demanded the government to manage the size and composition of Crown’s balance sheet. According to the strategy, the government should be responsible in ensuring the crown revenue is collected in a transparent and efficient way. The crown revenue has to be stable to provide sufficiently for the economy. The fiscal strategy would then reduce the fiscal deficit. By reducing the deficit, the government shall restore the fiscal buffer against future adverse events. During this period, the government will gain the necessary experience to deal with other long-term fiscal pressures. Additionally, eliminating the fiscal deficit will increase the general national savings. It would give the government the option of supporting further investments and reduce the levels of future borrowing. Moreover, the government will be able to fund its operations with ease. The above strategies highlight how the government plans to deal with balancing between operating revenues and expenses, and how to clear the debts. The government included the fiscal trends of the next ten years. It indicates the government’s long-term fiscal objectives (Malinowska-Sempruch 2013). 2.3 Supply-sided policies The New Zealand government uses the supply-side economic theory in order to raise the country’s supply potential. The finance department often uses both the fiscal and supply-side policies to improve the New Zealand’s productivity levels. The policies come in the form of tax incentives, availability of investment opportunities, and adequate training of the country’s workforce (Kissel 2009). Market experts argue that the slow economic growth experienced in New Zealand issue to the country’s lack of ability to increase supply in the markets. It is contrary to early reports that the slow growth is due to decrease in demand (Econfix 2012). The policies have helped New Zealand tackle recessions with ease. The New Zealand government has increased capital spending on the economy’s important infrastructure. For instance, the government has allocated funds for construction activities in New Zealand. The government has reduced its tax on business. For example, a reduction in corporation tax is a means by New Zealand government to stimulate investment activities. Other policies include improving access to quality education and training, stimulation of business start-ups, and maintenance of openness to trade from overseas (Riley 2010). Reference List Econfix. "Supply-Side Economics and the NZ Economy." Econfix, 2012: 1. International Monetary Fund. New Zealand - Statistical Annex. International Monetary Fund, 2000. Kaimahi, Kauae. "Ten Actions to reduce poverty in New Zealand." NEW ZEALAND COUNCIL OF TRADE UNIONS, 2014: 1-5. Kissel, Mary. "You Cant Spend Your Way Out of the Crisis." The wallstreet journal, 2009: 5. Mackenzie, Dene. "Balance of payments closer to truth." Otago Daily Times, 2013: 1-2. MacPherson, Liz. "Balance of Payments and International Investment Position: March 2014 quarter." Statistics of New Zealand, 2014: 1. Malinowska-Sempruch, Kasia. "New Zealand, legal highs and sensible supply-side policies ." 2013: 4. OECD. OECD Economic Surveys: New Zealand 2013. OECD Publishing, 2013. Riley, Geoff. "How can supply-side policies help in a recession?" tutor2u, 2010: 5. The Treasury. "Fiscal Strategy Report 2014." Fiscal Strategy Report 2014, 2014: 3. The New Zealand Herald. "Economic growth will keep rate hikes coming." The New Zealand Herald, 2014: 3. Read More