Economic Outlook

October 2018: In the driver's seat (PDF 724kB)

The economy is undergoing a transition. Previous engines of growth are not revving as they once were and the economy is facing headwinds. In our view, the economy will struggle to grow above trend and acceleration in GDP growth from here seems unlikely. Based on our expectation that GDP will grow 2½-3% y/y, we expect it will be difficult to sustain inflation near 2% y/y over the medium term. Headline inflation looks set to rise, but much of this will be transitory and the RBNZ will look through it. We currently see the OCR on hold for the foreseeable future; the RBNZ has time to see how conditions evolve. But given the risks of an eventual growth sputter, we see it as more likely that the next move is a cut than a hike.

Summary chartpack (PDF 1.25MB)

July 2018: Shifting landscape (PDF 524kB)

This economic cycle has been characterised by strong rates of GDP growth yet stubbornly low inflation. But we believe the economic landscape may be shifting. The economy is going through a softer patch and we expect it will struggle to grow above trend from here. On the other hand, cost pressures are increasing and look set to push inflation higher, though likely in a gradual fashion. On balance, and all else equal, we expect inflation will increase and that the OCR will eventually rise: we are pencilling in a hike for November 2019. But a lot can happen between now and then – and it will take some time for an interest rate increase to be on the table. We think risks to the domestic inflation profile are skewed to the downside, which could see the hiking cycle pushed even later. And if conditions deteriorated significantly, a cut could eventuate quite rapidly.

March 2018: Looking trendy (PDF 368kB)

Our forecasts depict an economy growing broadly around trend for the next couple of years, with the unemployment rate set to remain low. It is hardly a negative story. We see wage growth gradually lifting off lows, corresponding with a modest broadening in domestic inflation pressures in time. That lift should eventually see the RBNZ join other central banks in removing monetary policy stimulus. However, we feel strongly that it will be late to that party, with the first hike not until the second half of 2019.

December 2017: Some harder yards (PDF 336kB)

Some clear headwinds are being navigated right now that have increased the odds of a growth wobble. However, we are not ready to call time on the cycle just yet. There are still enough positive forces that should see growth returning to broadly around trend over the next couple of years (but probably not much more). It is admittedly a more nuanced economic story, but one that still has a positive hue to it overall.

September 2017: Driver swap (PDF 340kB)

We expect GDP growth to hold in a 2½-3% range going forward. A necessary turn in the housing cycle, weak productivity growth and capacity constraints cap the upside. At the same time, the drivers of the economic expansion are evolving; we are at peak construction and net migration, but commodity prices, solid household income prospects and fiscal policy are set to provide impetus. While tighter, financial conditions also remain supportive. We retain a bias that the OCR will head higher in time, but it is not a strongly held view.

July 2017: Sailing on (PDF 304kB)

Momentum is picking up from a lull over late-2016 to early-2017. This pick-up will be modest, with the economy facing capacity constraints and late cycle challenges. Our forecasts depict an economy growing at a pace strong enough to continue to gradually absorb spare capacity. But it’s a solid, rather than stellar, story. Core inflation will slowly rise, and interest rates too.

March 2017: Maturing gracefully (PDF 280kB)

The economic cycle has reached a mature stage. Historically, sharp slowdowns have followed. But we don’t believe the cycle is about to roll over and expire due to domestic considerations. Credit/housing related excesses are being more actively curtailed, which lessens the odds of imbalances building further and ultimately bringing about a nasty future correction. Numerous support factors remain, which should allow annual GDP growth to hover around 3% over 2017.

December 2016: Cycling around (PDF 312kB)

The economy is entering its eighth year of expansion with strong momentum. But natural headwinds are now emerging (capacity pressures, a turn in the credit cycle, tighter financial conditions, stretched asset valuations) that should see growth ease over the course of the year from 3½-4% towards 3%). We view this moderation as healthy. Price pressures are now building – we expect the RBNZ to begin removing stimulus from mid-2018 (but wouldn’t rule out earlier).

October 2016: Just what I needed (PDF 320kB)

Momentum in the economy is strong and the expansion has some legs yet. But late-cycle challenges are emerging. A natural balance sheet constraint will require credit growth to ease up, and this – in association with capacity constraints – is a key reason we expect GDP growth to ease from a strong to solid pace over the coming two years.

July 2016: Rolling with the punches (PDF 336kB)

The economy continues to perform well and we expect more of the same over the years ahead. Challenges in dairying and a high NZD are being outweighed by other sectors. Solid demand will see capacity constraints intensify and domestic inflation pressures gradually lift off lows. Key risks are that a) too much domestic-centric growth, a housing market boom and the associated debt build-up will require a purging process; and b) global wobbles turn into outright weakness.

March 2016: Split personality (PDF 264kB)

The economy has Jekyll and Hyde characteristics. Housing is booming, as are construction and tourism. Yet dairying is in the doldrums and will be for some time. The mix of growth (borrow and spend) is not sustainable and a lower OCR (courtesy of low inflation and global unease) will mean more housing largesse at a time households are already heavily leveraged. Amidst uncertainty, we are forecasting 2½-3% growth over the coming three years.