Home Page GDP vulnerable to weak growth - NZResources.com
Our Sponsor
All articles are now Free to View!
26/11/2018 — General
GDP vulnerable to weak growth
By Simon Hartley

Economic growth for the remainder of the year and early-2019 is expected to be softer than predicted, coming in under 3% as opposed to just over 3%.

ASB chief economist Nick Tuffley said the country's growth outlook remained reasonable, but risks of weak growth had intensified a little further.

“Questions remain over how much cooling will be caused by weak business confidence and trade tensions,” Tuffley said. He expected growth in the last part of 2018 and into early 2019 to be a touch softer than what it could have been, slightly below 3% instead of slightly above 3%.

“So far the economy has held up relatively well in the face of two high-profile uncertainties: stubbornly-weak business confidence and escalating trade tensions,” he said.

Repeated business surveys during the past four months have reflected falling confidence in businesses future outlooks, largely in the face of uncertainty over the effects of Government policies.

Westpac chief economist Dominick Stephens sees GDP's annual average for 2018 ending at 2.8%, then rising through 2019 to 3.2% and easing back the next year to 3.1%.

“Auckland and Canterbury are experiencing lacklustre economies and flat or falling house prices. (However), there is a completely different feel in some other parts of the country, where local economies are at their most buoyant in years,” he said.

Stephens predicts the overall economy will continue to improve, before a renewed slowdown sets in during the early-2020s.

“New Zealand is on track for a stronger, albeit temporary, patch of growth over the next couple of years, supported by house prices, building activity and Government spending,” he said.

Westpac had recently raised its forecast of house price growth, which in turn would help support consumer spending. However, there were several headwinds for the housing market.

“We're expecting house price growth to remain modest over the coming years, turning to declines by 2020 as interest rates gradually rise,” Stephens said. Inflation had come off an extended period of weakness in recent years, but in the September quarter there was larger than expected rise in consumer prices, which saw annual inflation rise to 1.9%. The Reserve Bank target remains mid-way between 1% and 3%.

Stephens said the inflation backdrop was “now looking firmer” than expected, with headline inflation set to rise to 2.2% in coming quarters. He highlighted much of that increase could be credited to rising fuel prices, which would be temporary. Fuel price volatility aside, Stephens said inflation would be a “little over” 2% by 2020.

A major factor supporting near-term GDP growth was the planned acceleration of Government spending, with sizeable funding boosts for health and education sectors in coming years.

“Much of that is likely to go towards hiring and pay increases,” Stephens said.

Tuffley said it was encouraging that there had been few tangible signs that the business confidence plunge had filtered through to economic growth. Capital goods imports were holding up, as was credit growth to businesses, he said.

“There are some early signs that business confidence is stabilising, albeit at a level usually consistent with weak economic growth,” Tuffley said.

Escalating trade tensions between the US and China have also been noted in recent surveys, with China being NZ’s largest trading partner, but also having historical and strong economic ties with the US.

Tuffley said while the trade tensions continue to simmer between the US and China, and had not really impacted on New Zealand, a wary eye had to kept for any slowing of Chinese consumer spending growth. Those trade tensions, capacity constraints, and cost pressures with contracting profit margins will be part of the story.

Tuffley expected some business capital expenditure would be deferred in the short term, which would “take the edge” off NZ's near-term growth performance.

“As the Government firms up key policies over time, the added uncertainty businesses seem to be feeling at present should subside.” Inflation pressures at present were benign enough that the Reserve Bank's interest-driving official cash rate can remain on-hold well into 2020; which has been predicted by the central bank and has consensus among economists.

*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.

Accessed via NZResources.com account: - no subscription / expired subscription