ECONOMY 'FALLING INTO PLACE'
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21 August 2018 – The economy may be slower, but it is moving on to a surer long-run footing, says Westpac
Westpac’s latest Quarterly Economic Overview presents a rather more reassuring picture of New Zealand’s economic future than the current crop of business confidence surveys might have you believe.
‘The pieces of the puzzle that we laid out in past Overviews are now falling into place,’ says Dominick Stephens, Westpac’s Chief Economist. ‘We have consistently warned that the economy would slow, businesses would feel the impact, the Treasury and Reserve Bank would revise their forecasts down, and the New Zealand dollar would fall. All of this has come to pass.
‘Our unchanged view is that the next phase for the New Zealand economy will be a modest and temporary pickup in growth on the back of government spending. Beyond 2019, we continue to expect a gradual cooling in economic growth. The economic slowdown to date has been a domestic spending phenomenon. The flipside of lower spending is higher saving, as evidenced by New Zealand’s shrinking overseas net debt position. What we are now witnessing is the long-awaited rebalancing in the New Zealand economy. The economy may be slower, but it is gradually moving onto a surer long-run footing.’
Meanwhile, the Overview notes that strong global economy and falling exchange rate have left New Zealand exporters well positioned. The quiet achiever has been services exports such as software and tourism.
A few highlights from the latest Overview are featured below – download the full report for more detail.
With a cooling in economic activity there has been a sharp decline in business confidence, and we expect this will weigh on both investment spending and hiring decisions. However, business surveys appear to be overstating the degree of weakness in activity, and the responses likely reflect some unease around the new Government’s economic policies. (It’s worth noting that franchisors are generally more positive about general business conditions compared to other surveys - Ed)
Looking ahead, we expect that the next phase of the economic cycle will be a pickup in GDP growth to just over 3 percent in 2019. One of the key factors that will add to demand over the coming years is the large increase in Government spending that is now being rolled out. That includes around $1.5b of spending on the Government’s families package and accommodation support payments, which will provide a significant boost to the disposable incomes of many households. The coming years will also see big spending increases in other areas, including health and education.
Strength in the export sector will also help to bolster New Zealand’s economic performance. Beyond 2019, we expect GDP growth to cool once again, as slowing population growth and weakness in the housing market offset increases in fiscal spending.
Two areas of particular concern to the franchise sector are the availability of suitable staff and the potential pressure on wage costs from increases in minimum wage rates. The Overview suggests that there will be only small and predictable changes in these areas.
Looking ahead, we do expect to see a further modest rise in the unemployment rate to 4.7% next year, in a lagged response to the slowdown in GDP growth that has already taken place. However, this rise is expected to be short-lived, with the unemployment rate to head lower again after GDP growth picks up.
Wage inflation increased to 1.9% in the year to June, and we expect it will rise to around 2.3% p.a. over the next few years. Although the unemployment rate is expected to increase modestly in the short term, it is still relatively low and a firming in GDP growth is on the cards. Wage growth will also be boosted by increases in the minimum wage and collective bargaining agreements, especially in some public sector roles.
Interest rates are always of concern to business owners, especially those looking to borrow to finance new ventures such as franchises. There is some reassurance in the Overview that interest rates are expected to remain at reasonably low levels. It says:
We are now forecasting that the OCR will remain on hold until May 2020 and will rise slowly thereafter, whereas we previously predicted that the OCR would begin rising in November 2019. But the real question is whether or not the RBNZ will cut the OCR in the foreseeable future. We certainly take seriously the possibility – we put the odds of a cut at around one in three. But it is more likely that the flow of data this year will not support an OCR cut.
We expect inflation to remain well contained. Consequently, although we do expect longer-term swap rates to rise, our long-term interest rate forecasts are no higher than in previous Overviews, and are not high by the standards of history. The other facet that the Reserve Bank has hinted at in its recent communications is a willingness to loosen its loan-to-value ratio restrictions. The Governor has repeatedly stated that he is pleased with the housing market slowdown and “will need to look at the LVRs”. We continue to anticipate a loosening of the LVR restrictions will be announced in November and implemented in January.
For more detailed information, download the full Quarterly Economic Overview.
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