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NEW CHAPTER FOR NZ AS ECONOMIC POLICIES BECOME CLEARER

by Simon Lord,
last updated 22/11/2017

22 November 2017 – What impact will new government policies have on the economy, and what will this mean for franchising?

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The latest Westpac Quarterly Economic Overview suggests a slower 2018, boosted GDP for 2019 and 2020.

The latest Westpac Quarterly Economic Overview suggests a slower 2018, boosted GDP for 2019 and 2020.

Westpac’s latest Quarterly Economic Overview makes interesting reading. The previous Overview, in August, identified the prospect of a Labour + Greens + New Zealand First government as the combination that would have the biggest impact on economic forecasts – now that has come to pass, much of the latest Overview is devoted to an assessment of what proposed government policies will do to the economy.

‘The Government’s plan to borrow more and spend more will stimulate the economy over time, but law changes designed to slow the housing market and net migration will have the opposite effect,’ says Dominick Stephens, Westpac’s Chief Economist. ‘As a result, we have revised down our GDP forecast for 2018, but upgraded our GDP forecasts for 2019 and 2020.’

‘That’s a bit different to the Reserve Bank’s assessment and some of the chatter around financial markets, which is that the new Government’s policies will boost GDP, inflation and the OCR. We agree, but only up to a point. The Government’s plan to increase spending will certainly boost the economy, although crowding-out of private sector activity [eg. in healthcare, labour and construction] must also be considered. Meanwhile, the Government’s various plans to cool the housing market and reduce net migration will slow the economy next year.’

Immigration to affect franchise re-sales, staffing?

The Overview notes that net immigration has already passed its peak and is now falling faster than previously expected. Much of this is due to a lift in departures of non-New Zealand citizens, which have risen by more than 30% in the past year. ‘This is an echo of the sharp rise in arrivals, many of them on temporary visas, over the past few years. New arrivals have also declined, with monthly inflows down 10% from their peak. With global economic conditions improving, we expect that both New Zealanders and foreigners will be increasingly encouraged to seek their fortunes overseas and, combined with the ongoing exit of temporary migrants, this will see net migration fall sharply.’

Slower net immigration can be expected to impact upon franchise recruitment – particularly in the food & beverage sector, where a significant proportion of franchise resales are to recent immigrants. This may have a knock-on effect on resale values. The other concern relates to employment, as staff may be harder to find. Minimum wage increases may help stimulate the economy, but the Overview suggests that some businesses will switch to automation while others will be simply unable to afford the wage bill. No mention is made of the tax cuts for small businesses which the government has suggested could off-set higher wage costs. Unemployment is expected to rise in 2018 due to the sluggish economy, but to fall from late-2019 onwards as the fiscal stimulus kicks in.

Could slower house price growth stimulate business sales?

Cooling in the housing market has seen house prices in Auckland and Christchurch fall slightly over the past year, and the Westpac economists are of the opinion that although house price inflation will continue, it will be at a lower rate over the next few years. They note that, in New Zealand, house price inflation tends to correlate closely with growth in consumer spending. There are early signs that this relationship has continued to hold as the housing market has cooled with electronic spending softer in recent months – particularly for durable household goods.

The Overview was prepared prior to the announcement of Auckland’s new valuations, which saw an average rise of 45 percent in property values across the city. This quantifies the increased equity that many people will have in their homes. More equity means more capacity to borrow, which in a rising property market encouraged many to invest in rental properties. With slower growth – and the prospect of a capital gains tax in the future – home owners may be more inclined to invest in a business which offers good cash flow. In this instance, franchises should prove attractive providing funding remains affordable (it is currently at historically low levels).

‘After considering all angles, we remain comfortable forecasting no hike in the OCR until late-2019,’ says the report. ‘Of course, how the RBNZ behaves will depend critically on the choice of Governor and the policy framework under which he or she operates.’

Download the full Westpac Quarterly Economic Overview in pdf form

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