New Zealand’s economy has slowed in recent months despite the continuing boom in housing. In this summary of the latest ANZ Economic Outlook report, we explain the factors shaping New Zealand’s economy and the implications for the housing market.

There have been further signs of slowing economic growth in New Zealand over recent months, with a rising Kiwi dollar increasingly making its presence felt on export incomes.

Annual average Gross Domestic Product (GDP) growth eased slightly to 4.3% in the year ended March 2003, down from the peak of 4.4% in December.

But this reasonably solid March quarter result belies the extent of recent weakness experienced by the New Zealand economy.

Indeed, we believe that GDP was flat – and may have even contracted slightly – during the June quarter.

SARS and electricity problems undermine growth

Economic activity during the period has been undermined by the impact of SARS and electricity problems.

Overseas visitor arrivals in May were down 13% on the same time last year.

There have also been widespread disruptions to logistics and marketing operations for exporters to the Asian region during recent months.

Problems in the electricity sector have created trouble for the economy in recent months; forcing many major users within the manufacturing sector to scale back production.

However, recent rainfall has returned hydro lakes to average levels for this time of the year and wholesale prices have fallen sharply as the electricity crisis has waned.

Business confidence down

Against this background, business confidence has declined. We believe that this overstates the extent to which growth is slowing, reflecting instead the uncertainty associated with recent developments.

Indeed, signs that the worst of the SARS epidemic and electricity problems are largely behind us have prompted a tentative revival in sentiment in the most recent monthly surveys. But the impact of further New Zealand Dollar gains on the export sector may limit the extent to which business confidence recovers.

For the time being, weak sentiment threatens the prospects for investment and employment activity.

House prices power along

Despite slowing growth in the economy generally, the housing market remains in great shape.

The latest Real Estate Institute of New Zealand (REINZ) data revealed an unprecedented 11,000 house sales in May. The median house price rose to a record $210,000 – a rise of almost 12% over the past 12 months.

Three key factors are driving property prices:

1. Strong net immigration continues to create significant demand for housing. More than 42,500 people migrated to New Zealand in the 12 months to May, up 36% on the same period last year.
2. The relative strength of New Zealand’s economy (and labour market in particular) and this country’s isolation from the world’s trouble spots continues to attract new arrivals and ex-pat Kiwis.
3. Continued sharemarket uncertainty and the three-year bear (depressed) market in global shares have cemented residential property as the investment of choice for New Zealanders.

Interest rates favour property market

The housing market is a direct beneficiary of the Reserve Bank’s efforts to bolster the slowing economy via cuts to the official cash rate.

But given that the risks associated with SARS and electricity problems are now waning and the domestic economy is remaining fundamentally sound, we would caution against expecting the Reserve Bank to cut rates much further (if at all).