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KEEP ON TRUCKIN’, SAYS NZ ECONOMIC FORECAST

by Simon Lord,
last updated 18/08/2016

in this article:

August 2016 - The New Zealand economy is set to continue growing at a firm pace for some time, according to the latest Westpac Economic Overview

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The latest Westpac Quarterly Economic Overview

The latest Westpac Quarterly Economic Overview

GDP growth is expected to remain firm over the next few years with strong construction activity, low interest rates and strong population growth off-setting lingering headwinds in the externally exposed parts of the economy (the Exchange Rate Forecasts make interesting reading for franchisors and master franchisees with overseas links). For the immediate year ahead, growth is looking a little stronger, while inflation is looking weaker.

‘In some ways, it’s not surprising that the New Zealand economy has stayed the course,’ says Michael Gordon, Westpac’s Acting Chief Economist. ‘As we identified in our previous Quarterly Economic Overview, the greater challenges for the local economy lie a few years ahead and a slowdown in growth remains on the cards through the latter part of the decade. We know that the Canterbury earthquake rebuild is a finite job, and as it enters its wind-down phase in the coming years it will be as much of a drag on growth as it was a boost on the way up.’

The other challenge for New Zealand is the pace at which households are accumulating debt against property, the Overview suggests. The eye-watering pace of house price growth has given rise to renewed concerns around financial stability. The Reserve Bank has already stepped in to cool the market through tighter lending restrictions and further interventions are likely.

‘Nevertheless, tight supply, strong price increases to date and the likelihood of continued low interest rates have prompted us to once again revise up our forecasts for house price growth,’ says the report. ‘We now expect nationwide house prices will rise by 16 percent over 2016 (up from an already strong forecast of 11 percent at the time of our last Overview, which included an allowance for a tightening in macro-prudential policy). A further 8 percent gain is expected over 2017.

A special topic in this latest Overview highlights how, compared to other developed economies, household debt levels in New Zealand are high and have been climbing at a relatively fast pace. ‘Increases in debt levels are not necessarily a problem for the economy,’ suggests the Overview. ‘However, this does add to the economy's vulnerabilities. This dynamic can sustain itself for some time, but we believe that it will eventually reach a natural limit. And as households turn their focus to repaying debt, it will be retailers and other consumer service businesses that find themselves most exposed.’

Download the full 16-page Quarterly Economic Overview here.

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