Westpac forecasts slower growth but has faith in policy

According to Westpac Chief Economist Dominick Stephens, ‘Storm clouds have gathered over the global economy, and New Zealand is getting caught in the downdraught.’ Writing in the latest Westpac Quarterly Economic Overview, he says, ‘We expect the situation to get worse before it gets better, as the escalating US-China trade war makes its mark on global economic growth. We’ve slashed our 2020 annual GDP forecast for New Zealand from 3.1% to 2.3%, and we expect unemployment will soon rise.’

‘The Reserve Bank is riding to the rescue, and in this Economic Overview we argue that it will be effective. Mortgage rates have tumbled, and if further stimulus is required the Reserve Bank has options. We expect tumbling interest rates will spur asset prices, including an acceleration in house price inflation from around 1% now to 7% next year. Combined with expanding government spending, that will shore up GDP growth.’ The Overview forecasts GDP growth of 2/3 percent in 2020, rising to 2.8 percent in 2021.

‘But propping up growth in this manner will deepen the long-term risks in the economy. New Zealand is locked in a cycle of economic growth driven by ever lower interest rates causing ever higher asset prices, facilitated by ever increasing household debt. This cycle can’t last forever, and when it ends things could turn ugly. One possibility is that right now we are seeing the “beginning of the end”. That’s a risk but it is not my central view, because I think monetary policy is going to work.’

‘Things are more likely to come to a head when interest rates rise. There are a range of possible catalysts for that, but historically inflation has been the party pooper. I can’t see inflation ramping up any time soon, and that’s why we are forecasting another turn of the merry-go-round over the coming year or two. But the ride will stop eventually – further in the future, we are forecasting a period of rising inflation, higher interest rates, falling house prices and a downturn in GDP growth.’

Implications for franchise buyers

While the Overview notes that, ‘Businesses are reporting tough trading conditions, including strong competition, rising costs and sluggish demand,’ the recent Franchising Confidence Index suggested that franchisors were feeling a little more positive about their prospects.  One aspect of particular concern is access to suitable staff, with unemployment rates down to under 4 percent. However, the Overview expects this to rise to 4.2 percent by the end of the year, and while population growth is continuing to slow it remains positive for now. Longer term though, unemployment is forecast to drop further by 2022.

Household spending remains subdued, thanks to an ongoing weakness in housing markets in some parts of the country and high petrol prices. The Overview suggests that house price inflation will increase again next year. Meanwhile, the Commerce Commission’s recent report suggesting that the fuel industry is not as competitive as it should be will presumably see fuel prices lowered at least for a short time, as these reports generally do. In the long term, much will be dependent on exchange rates, which the Overview describes as a ‘race to the bottom’ as global monetary easing takes place.

One area that impacts considerably upon franchisees is interest rates. Although the Official Cash Rate is already at a record low, Westpac suggests there is more to come, with a special feature on ‘What happens if the OCR reaches zero?’ Low interest rates are attractive to those buying and funding businesses, making funding more affordable and promising faster repayment of debt.

However, purchasers need to be aware that rates will rise again one day and allow for that in their calculations. It’s also worth noting that existing franchisees looking to sell may increase the price asked to reflect the potentially higher returns that come from lower funding costs. Here’s a helpful guide to Understanding the Numbers for franchise buyers.

Download the full Westpac Quarterly Economic Overview here.

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