Although the New Zealand economy has been relatively resilient through the COVID-19 crisis so far, the outlook remains highly uncertain. The downturn is still getting underway, and there is noise in the data and much still to be learned about the true state of the economy. Weighing up the outlook in the face of this uncertainty is a challenge for policy makers, businesses and households alike. But although much is unknown, there are some key features that will shape the outlook.
The New Zealand economy has been able to return to something closer to normal, but the outlook is a challenging one. Closed borders mean a smaller economy, and recessionary impacts of this are unavoidable. Households and businesses are cautious and unemployment is rising. Investment and spending will be weaker, with policy providing an important but only partial offset. The slowdown will be large and the recovery slow. We present alternative scenarios to help articulate the degree of uncertainty around our central outlook. The common thread is that risks are skewed to the downside. Given the global recessionary dynamics that are already in train, upside is limited. While there are 50+ shades of grey around the outlook, we think the implications for are actually quite binary.
The world is in the midst of an unprecedented health and economic crisis. The COVID-19 pandemic is wreaking havoc on lives and livelihoods, including here in New Zealand. Unprecedented activity restrictions have been absolutely necessary, but have stopped the global economy in its tracks. The economic slump underway is truly enormous. Rightly, the crisis has galvanised policymakers with governments and central banks taking unprecedented steps to cushion the blow and ease pressures in financial markets. Nonetheless, the impacts of this crisis will be with us in months and years to come.
As we enter 2020, we begin the next chapter for the New Zealand economy. While capacity pressures have eased, economic momentum appears to be finding a floor, with drivers in place for gradual improvement over the next two years, despite headwinds. Housing market strength, fiscal spending, high terms of trade, the tight labour market and low interest rates are expected to provide support. We assume the coronavirus outbreak will weigh a little on our export prices and volumes in the near term, but impacts are highly uncertain at this stage. GDP growth is expected to sit around trend on average, with inflation close to target. The RBNZ can afford to be patient, waiting to see how the story unfolds. The economy is at a crossroads and the political and international context will be crucial. We see upside risk from housing and fiscal spending, but large downside risks from unforecastable global shocks, including the potential impacts of the new coronavirus.
No one’s disputing the fact that the New Zealand economy has a little less wind in her sails. We’ve been seeing it in the leading indicators for a while; it’s now been confirmed in the hard data; and the view from the crow’s nest is that there’s a little more softening to come. While it’s our expectation that growth will stabilise and begin to recover gradually in early 2020, this is contingent on a couple of key economic drivers holding steady as the swell continues to pick up. And with the RBNZ expected to use up all of its conventional fuel just keeping the ship on course, we’re only one storm away from being blown into the uncharted territory of unconventional monetary policy. Let’s hope the Government can see the darkening clouds on the horizon and is readying its fleet to lend a hand if the SOS goes from monetary policy needing friends to New Zealanders’ wellbeing needing a lifebuoy.
The New Zealand economy has been gradually slowing as key economic tailwinds and headwinds duke it out, and it's still not entirely clear which will be on top by year-end. We expect the tailwinds will regain the upper hand, seeing growth bottom out shortly. While these two opponents are closely matched, help is undoubtedly on the way. The RBNZ has already cut the OCR, and we expect they'll do so again in August and November; the NZD remains around 2% below late-March levels; and Budget 2019 included a little extra fiscal stimulus. All up, we see annual growth slowing to 2% in Q2, before gradually lifting towards 3% in 2021. That's not going to drive a strong inflation pulse, but we expect it will be sufficient to keep core inflation elevated close to the target midpoint.
The New Zealand economy has been evolving broadly as expected, but softening near-term indicators have led us to downgrade the near-term outlook. Economic tailwinds are blowing a little more softly than they once were, and that’s being reflected in waning capacity pressures. We have brought our OCR cut call forward, with a 25bp cut pencilled in for August (previously November), and two follow-up moves in November and February. With the RBNZ now expected to come to the party a little earlier than we previously thought, it shouldn’t be long before the economy gets the stimulus it needs to push economic activity back into inflation-building territory.
The New Zealand economy has had a good run, and while it’s not over yet, annual growth with a 3-handle over the next couple of years looks a stretch. Momentum has slowed, and it’s likely this process has further to run as the drivers of growth continue to become less synchronised. Adding to the list of headwinds, confirmed and probable changes to bank capital requirements suggest financial conditions will gradually tighten. All up, slowing growth in the context of inflation that’s still shy of the RBNZ’s target midpoint means the case for a little extra monetary stimulus will become evident. We expect the RBNZ’s next move will be a cut.
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.
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.
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.
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