New Zealand to move from rock star to rock solid economy

Reporting by Matthew Taylor | Writing by John Phillips
After 2014 elections, what's next for New Zealand?

As the outperformance that earned New Zealand the status of 'rock star economy' begins to wan, the government should focus on ensuring a 'rock solid' economy, New Zealand Treasury Secretary and Chief Executive Gabriel Makhlouf told CNBC on the sidelines of the Group of 20 meeting in Australia.

New Zealand bucked the poor global growth trend over the past few years, posting a strong economic performance as a series of headwinds dragged growth elsewhere. It grew an annual 3.9 percent on year in the second quarter – the fastest rate since the second quarter of 2004. However, on a quarterly basis the economy expanded 0.7 percent, slowing from three consecutive quarters of growth of 1 percent or more and suggesting a peak in the current growth cycle.

Meanwhile, in August, Makhlouf said the New Zealand government will reach its budget surplus forecast this fiscal year but noted that future surpluses could be lower than expected as economic activity is weaker than forecast in May. The budget has been in deficit since 2009.

Read More NZ economy grows at fastest annual pace in 6 years

"We're forecasting that [the strong growth performance] will taper off a bit but we certainly want to move from being described as a 'rock star economy'… to being a 'rock solid' economy," he told CNBC.

"The government that was in place until now, its plans are pretty clear and credible in terms of its fiscal strategy and the reforms it wants to make to the way public spending is done. So I'm pretty confident actually that… on the current trajectory we'll continue to see growth in New Zealand and a more robust economy," he said.

While growth may have peaked at home, Makhlouf said the global economy is the biggest risk for New Zealand.

"What happens in Europe, which we are concerned about, the extent to which U.S. growth is sustained, what happens in China, which is now our biggest trading partner, and Japan and the rest of the world – global risks are the main risks to a small economy like New Zealand, and we're keeping a very close eye on that," he said.

New Zealand

Kiwi dollar

The New Zealand dollar outperformed its peers in the first half of the year driven by strong domestic economic momentum, central bank interest rate hikes and the country's terms of trade, which is at a 40-year high. However, currency strength has been a cause for concern at the central bank.

After hiking rates at its June policy meeting, the Reserve Bank of New Zealand (RBNZ) said the New Zealand dollar's level was "unjustified" and "unsustainable", raising expectations that it could intervene to weaken the currency. In September, the kiwi dollar weakened to a seven-month low against the U.S. dollar after the RBNZ said it expects "a further depreciation, which should be reinforced as monetary policy in the U.S. begins to normalize."

Read MoreNew Zealand hikes rates, so why is Kiwi sinking?

Makhlouf echoed the RBNZ's comments, noting a normalization of monetary policy globally would likely curb kiwi dollar strength.

"I think what's driven the strength of the [New Zealand] dollar is a combination of commodity prices, but also just the fact that we don't have normal monetary policy throughout the world," he said. "As we move to normality, I'd expect to see a lowering of the [New Zealand] dollar. In fact in the last few weeks that's what we've seen, and I'd expect over the next 12-18 months, as the United States in particular starts to [normalize policy], we'll see a change".

"But the fact is that New Zealand's dollar also reflects a strong economy, a strong credible economic strategy, and at one level, the markets react to what they see in a very positive light. And to a certain extent the dollar is going to remain strong but not as strong, I think, as we've seen in recent years," he added.

The RBNZ has hiked interested rates four times this year, a stark contrast to ultra low rates in many of the world's developed economies, but Makhlouf doesn't believe the rate hikes are the dominant factor underlying kiwi dollar strength.

"There's been a lot of cash in the world and markets have looked for a good return, but I don't think [interest rate hikes have] been a dominant factor. I think the dominant factor has been commodity prices and just the simple fact that the economy is strong," he said. "[But] obviously leading the world in terms of monetary policy does put a bit of pressure on the currency."


Following the election of John Key to a third term this weekend, Mahklouf expects the Prime Minister's reform agenda to continue.

Read MoreNew Zealand Prime Minister John Key wins third term

"Firstly John Key has to finally decide who he wants in his government and he's indicated he's going to enter into a coalition, so we'll see what the final government's policy plans are," he said.

"But I'd expect the reform agenda you've seen in recent years continuing. I think the broad economic strategy, the indications are that they will continue with that, and certainly what I've heard from the Prime Minister and Minister of Finance over the election period will confirm that," he said.