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IT'S GOOD NEWS DAY
AS SIGNS POINT UPWARDS FOR NZ ECONOMY

by Simon Lord,
last updated 06/11/2013

in this article:

6 November 2013 - A series of announcement today have combined to suggest that New Zealand’s economy is truly on the turn

Statistics New Zealand has announced that unemployment has fallen more than expected in the third quarter to 6.2 percent, down a full percentage point from last year. The figures include surprisingly good jobs growth outside the boom town of Christchurch.

Meanwhile, an OECD report has found that not only does New Zealand enjoy higher employment figures than average, but the country ‘performs exceptionally well in overall well-being, as shown by the fact that it ranks among the top countries in a large number of topics in the Better Life Index.’

And a Fairfax report on the latest quarterly Westpac Economic Overview is headlined ‘Economy set to fly, says Westpac’ and focuses on the fact that the economy will grow almost four percent next year, helped along by a strong population gain from surging immigration.

In fact, the Westpac report is an economist’s blend of positivity tempered by caution. ‘With the effects of the drought now largely in the rear view mirror, and a continued upturn in the non-agricultural sectors, the New Zealand economy is set for a substantial acceleration in growth over the second half of this year and beyond,’ says the report. ‘In particular, the remarkably swift rebound in milk production in the last few months means that GDP growth is shaping up well in excess of 1% for the September quarter.

‘The breadth of this expansion is what gives us the most confidence that it will be sustained for another year or two. We’ve noted before that growth is occurring across a range of sectors, beyond the obvious suspects of construction and housing. Consumer spending is growing at an increasing pace – and spending on services was particularly strong over the June quarter, suggesting that it can’t solely be pinned on consumers getting more bang for their buck as a result of the high exchange rate. The manufacturing and services activity surveys have put in consistently strong readings over this year (as has the Franchise Confidence Index – Ed.). And export earnings are looking sunnier – China’s demand for primary products remains rampant, and tourism earnings have picked up this year, helped by the gradual reopening of the Christchurch market.’

According to Westpac Chief Economist Dominick Stephens, ‘New Zealand’s economic expansion is becoming apparent across a range of sectors and, increasingly, across regions.’ But he cautions, ‘We expect that over the next year the economy will start to exhibit some of the stresses and strains that come with sustained growth, including inflation pressures. The Reserve Bank will have to respond by raising interest rates – we expect the Official Cash Rate will go up three percentage points over three years.

‘House prices are on track to rise around 8.6% for 2013, which is very close to the 8% forecast we published more than a year ago in the August 2012 Economic Overview. For 2014, the outlook for house prices is more mixed. Rising population growth will boost demand, but high fixed-term mortgage rates and the Reserve Bank’s mortgage restrictions will be constraining factors. On balance, we think house price inflation will slow to 6.5% next year.’

Franchise New Zealand notes that, traditionally, higher house prices have helped to stimulate the franchise market, as increased equity has enabled people to borrow more easily to get into the business of their choice. However, if New Zealanders are not deterred by recent experience or government action from returning to their traditional love affair with bricks and mortar, then new franchisees could still be in short supply. (see Where are the buyers?)

Westpac forecasts that net immigration will reach 33,000 people by early 2015. As recently as August 2012, there was a net outflow of 4,100 people per annum from New Zealand.

The Economic Overview also sets out Westpac’s long-run forecasts for the economy. Westpac’s economists expect that over the next decade New Zealand’s trend rate of GDP growth will fall to 2.1% and inflation will trend higher as governments tinker with the Reserve Bank’s targets. Westpac is forecasting a period of house price decline in the second half of this decade, before house price inflation stabilises at around 4.6% per annum. Interestingly, one of the factors the report sees as limiting growth is New Zealand’s relatively low productivity rate. It would be interesting to hear an economist’s viewpoint of whether franchised businesses enjoy a higher or lower productivity rate than the norm.

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