The New Zealand economy is in an enviable state, according to BNZ head of research Stephen Toplis.
Growth was robust, employment prospects were good, the housing market was stable and global demand was supportive. NZ had fiscal surpluses and interest rates were low.
“From here, though, things get a bit more difficult and we expect economic growth to moderate despite significant fiscal stimulus.”
But, barring a major asset price corruption, induced by global monetary tightening, the prospects remained relatively sound for the medium-term. Global growth was firing on all cylinders.
The consensus of world expectations for the next 12 months, he said, was sitting just below its highest level since 2011. Importantly, the growth was being shared widely, giving an air of sustainability many past cycles did not share.
New Zealand’s trading partner expansion appeared to be peaking and nervousness about the potential impact of monetary tightening was beginning to spread.
“We remain cautiously optimistic but equally mindful a significant asset price correction could yet prove destabilising.”
New Zealand gross domestic product (GDP) economic growth had been moderating, he said.
On an annual average basis, the expansion peaked at 4% in the fourth quarter of 2016. By September last year, the pace of expansion had slowed to 3%. Further moderation was expected as population growth slowed and capacity constraints bit.
The economy could still continue to expand in a 2.5% to 3% range for the foreseeable future. A significant driver of growth over the next two years would be the fiscal impulse as the Government delivered a series of handouts to the household sector while pushing ahead with significant investment plans both in terms of housing and infrastructure.
Toplis said the labour market was becoming increasingly tighter. By the end of last year, the unemployment rate had dropped to 4.5%, the lowest it had been since December 2008.
Toplis believed it would go lower still. Feedback from corporate NZ suggested the level of unemployment meant it had become difficult to access both skilled and unskilled labour and labour had become a major constraint to higher production. Despite that, wage inflation remained well-contained.
“We continue to believe the strong demand for labour, coupled with aggressive minimum wage increases, will ultimately push wage inflation higher. That said, we concede we have been saying this for some time.”
Toplis said every time the scene was set for consumer price index (CPI) inflation to rise, along came something to smash the expectation. The latest came from the combination of a weaker-than-expected fourth-quarter result coupled with recent food prices which had been lower than anticipated.
It now could be June before inflation pushed up to 2%.If correct, inflation would have been below the mid-point of the Reserve Bank’s target band for 29 out of the past 30 quarters. For 13 of those quarters, it had been below the 1% lower band of the 1% to 3% range.
“We are not the slightest bit concerned by this as it largely reflects a relative income gain for New Zealanders as the country benefits from imported deflation.”
The new Government was determined to see net core Crown debt fall to 20% of GDP over the medium term by continuing the run of fiscal surpluses started in the year ended June 2015, Toplis said.
Fiscal expansion would be constrained by that objective. However, over the next 18 months, the fiscal impulse to the economy would be significant and there was a risk it could be even more aggressive than the Government currently assumed.
The Reserve Bank was showing no inclination to move its official cash rate this year. It maintained the view the cash rate would not be raised until the first quarter of 2020.
“We share the view no rate increase is likely this year as inflation remains well anchored below the mid-point of the bank’s target range. We do think a combination of financial stability concerns, a weakening $NZ and heightened capacity constraints will see the bank pull the trigger in the first half of 2019.”
There was increased uncertainty about the bank’s response given there soon would be a new Governor, Adrian Orr, and a likely change in the policy targets agreement. The $US was expected to depreciate against the major currencies as the concern about rising twin deficits more than offset the positive impacts of rising interest rates.
Toplis said the $NZ was expected to depreciate against the US currency as the yield differential moved in favour of the US and global uncertainty increased, reflected in lower demand for peripheral currencies such as the kiwi.
*Dene Mackenzie is business editor of the Otago Daily Times.