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.
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.
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.
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.
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.
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