NZ economy – stronger for longer

The New Zealand economy is humming along nicely, says the latest Westpac Quarterly Economic Overview, and the building, hospitality, retail and accommodation sectors are all particular beneficiaries. Annual GDP growth hit 3.6 percent in June, and the economy appears to have maintained this commendable pace of growth through the second half of the year, with 2017 also shaping up well.

‘A new facet of the story has been the broadening nature of that growth,’ says Acting Chief Economist Michael Gordon. ‘While familiar engines of growth including construction and tourism are continuing to chug along, in recent months there has been a broader improvement across sectors. In addition, there has been a notable improvement in the dairy sector, which we had expected to remain a drag on the economy.’

Also in contrast to expectations, annual net migration has continued its record-breaking run, rising to a new all-time high of almost 70,000 in September. Although student arrivals have continued to track lower (down almost 40 percent after peaking late last year) reflecting tighter enforcement of entry requirements, this has been partially offset by ongoing growth in people arriving on work visas (up 16 percent in the last 6 months).

Building remains a major driver, though, with low rates of building in past years followed by the recent population surge having left the country with what the Overview calls ‘an alarming shortfall of housing, largely concentrated in Auckland.’

This is having a knock-on effect in other parts of the country, with house prices growing even faster than Auckland in property hotspots such as Waikato, Bay of Plenty and even Wellington. On a nationwide basis, however, the Overview expects annual house price inflation to slow from 14 percent this year to 5 percent in 2017.

‘Low interest rates, strong population growth, the buoyant housing market and an improving labour market have all supported a lift in household spending,’ says Mr Gordon. ‘We expect continued strength on this front over the year ahead. The other factor that has been supporting the retail and hospitality sector has been ongoing strength in tourism. Visitor arrivals are up 13 percent in the year to September, and looking ahead to 2017, the sector will get a further boost from events such as the Masters Games and Lions tour.

‘Although the latest earthquakes could potentially put some visitors off, a key challenge for the sector will continue to be capacity constraints, with accommodation particularly stretched. This is likely to see increased activity in traditional shoulder seasons. The anticipated decline in the NZ dollar should help support spending going forward.’

This too shall pass

Although the stars may be in alignment for the NZ economy for now, the Westpac economists don’t expect the situation to persist indefinitely.

‘International events still clearly have the capacity to surprise. It’s not difficult to identify potential catalysts for a deterioration in the global economic backdrop, increased volatility in financial markets and more challenging international trade conditions. Uncertainty arising from a Trump presidency and protracted Brexit negotiations are just two contenders.’

More predictably, though, ‘The pace of population growth will eventually slow, additional household debt taken on in recent years will need to be repaid, the wind-down of the Canterbury rebuild will reduce construction activity, and house prices won’t keep heading north at their current eye-watering pace forever. What’s more, with credit conditions getting tighter, retail interest rates are likely to head higher from here, even if the RBNZ leaves the OCR unchanged for an extended period.

‘All this means we continue to expect the economy to slow in the latter part of this decade. GDP growth is forecast to slow from 3.4 percent this year, to below 2 percent by the end of 2019.’

Read the full Westpac Quarterly Economic Overview here.

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