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last updated 21/05/2019


Westpac predicts NZ economy to pick up growth

last updated 21/05/2019


22 May 2019 – The latest Quarterly Economic Overview from Westpac predicts more stability in the global economy and the NZ economy to exceed 3 percent GDP growth. What will this mean for franchising?

In his introduction to the Quarterly Economic Overview, Dominick Stephens, the Chief Economist of Westpac, writes, ‘The dramatic decline in interest rates over the past few months is going to be a game changer. For the past year or so the global and New Zealand economies have been slowing. But that is going to change, partly due to the dose of monetary stimulus that has just been delivered. Over the coming year we are expecting the global economy to stabilise and the New Zealand economy to pick up to above 3 percent GDP growth.’

‘Central banks around the world have veered towards lower interest rates because inflation is once again falling short of expectations. We have been talking about lowflation for years, and it has not gone away. New technologies and globalisation are holding consumer prices down across the world, including New Zealand. We are currently going through yet another iteration of what has become a familiar process. Low inflation allows low interest rates, which cause higher asset prices and a period of stronger GDP growth.’

‘In New Zealand’s case, much of this works through the housing market. The recent sharp drop in fixed mortgage rates, combined with the cancellation of capital gains tax, will be a major stimulus for house prices. We expect annual house price inflation to accelerate from 1.3% now to 7% over the coming year or so. That should spur consumer spending and remove the need for a further OCR reduction from the Reserve Bank.’

‘It is not all roses, however. The flip side of lowflation is that New Zealand businesses are struggling to pass on the cost increases that they are currently experiencing. Business confidence is low, and firms have become wary of investing or employing. This business malaise will be hard to shift, although it might ease a little over the year ahead.’

Business concerned about more than policy

As the Overview reports, surveyed business confidence has been weak for an extended period, and over time there have been more signs of this manifesting in business decisions. ‘Even though firms are citing capacity constraints and difficulty in finding workers, growth in business investment has been sluggish and private sector job advertisements have flattened off.’

‘No doubt some of this grumpiness relates to dissatisfaction with Government policies that have added to business costs, such as minimum wage increases, changes to employment law, and increased regulatory requirements. But an equally important aspect is that firms are not confident about their ability to pass on cost increases. Technology changes and international competition have put more power in the hands of consumers, and moreover, demand isn’t expanding quickly enough for firms to be able to justify price increases. As a result, firms see a squeeze on their profitability and are scaling back their expansion plans accordingly.’

CGT and interest rates could boost franchise buyers

It’s worth noting that the quarterly Franchising Confidence Index has also shown confidence concerns over the past 18 months or so, although in general the franchise sector is more positive than general business surveys. Franchisors and advisors welcomed the cancellation of the proposed Capital Gains Tax, so it will be interesting to see how far this affects overall confidence levels in the next survey.

The cancellation of the proposed CGT has also been noted in the Westpac report.

‘The Government has long expressed a desire to introduce a capital gains tax (CGT), and early this year the Tax Working Group recommended a CGT covering business assets as well as investment properties. In our earlier forecasts we had assumed that a CGT would be introduced in some form, if not the full-blooded version that was proposed. But in April the Government announced that will it not proceed with a CGT, and the Labour Party said it will not campaign on introducing a CGT for the foreseeable future. That decision could go some way to alleviating the gloom among businesses in recent months, perhaps giving a boost to investment and hiring. It also significantly alters the outlook for the housing market.’

The second major policy development referred to in the report is the Reserve Bank’s shift to further monetary easing. ‘History shows that interest rates have a powerful impact on the housing market, and the fall in mortgage rates over the last few months is the most substantial move that we’ve seen in some time. Between the cancellation of the CGT and the sharp fall in borrowing rates, we now expect house price growth to re-accelerate to 7% next year. That in turn will help to underpin household spending growth over the next couple of years.’

This is worth noting because one of the factors reportedly affecting franchise growth in recent years has been the reduced equity that home owners (especially in Auckland) have been able to borrow against in order to fund new business ventures. House price growth should ease this and may bring new buyers into the market.

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