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MIXED GROWTH OUTLOOK OFFERS OPPORTUNITIES, CHALLENGES

by Simon Lord,
last updated 22/05/2016

in this article:

May 2016 – The latest Economic Overview from Westpac suggests growth will slow in 2018 and house prices stagnate at last. What does this mean for business buyers?

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May 2016 Economic Overview

May 2016 Economic Overview

After expanding by 2.5 percent over 2015, the economy is forecast to grow by 2.7 percent in 2016 and 2.6 percent in 2017, according to Westpac’s latest Quarterly Economic Overview. While those are healthy rates of growth, they mask a mixed outlook across the economy. Regions that are closely linked to the dairying sector and a number of other commodity exports are experiencing subdued growth. But at the same, the combination of low interest rates, strengthening housing markets, and strong population growth are providing a powerful boost to economic activity through other parts of the economy.

‘However, we are now in a new phase of the economic cycle,’ says Dominick Stephens, the Chief Economist of Westpac. ‘Growth is being challenged by the dairy downturn and the levelling off of the Canterbury rebuild. There are partial offsets in service sector activity, rapid population growth, and burgeoning construction activity in Auckland and a few other hotspots. But the real kicker for growth in the current phase is debt. Households have thrown caution to the wind, and a borrow-and-spend dynamic has emerged amid rising house prices.’

‘We expect the current phase will continue for another year or so. During that time we expect to see reasonable GDP growth, albeit not as strong as the heady heights reached in 2014. Meanwhile, we don’t necessarily believe that the OCR will have to fall below 2 percent during this phase, as markets are proposing.’

‘But debt-fuelled growth is not sustainable. For that matter, neither is the Canterbury rebuild or rapid population growth, both of which we expect to taper off. So we expect the New Zealand economy to enter a phase of slower GDP growth, beginning around 2018. At that time, we would expect to see interest rates and the exchange rate falling, while house prices stagnate or fall,’ Mr Stephens concludes.

For potential franchisees, the prospect of falling property prices at last may mean that it is worth considering business opportunities in the near future before other investors enter the market. However, as always, care must be taken to choose not just the right industry, but the right opportunity within that industry and the right region for your new business.

It’s also important to take financial advice so that you don’t overstretch yourself by borrowing too much while rates are low and high property prices offer increased equity.

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