STATE OF THE NATION – DECEMBER 2017
Economic Update from Sharon Zollner – ANZ Chief Economist
The economy is about to mark off its eighth consecutive year of expansion. If history is any guide, then the cycle is perhaps getting a little long in the tooth.
Our new Deputy Prime Minster seems to be aware of that risk. In his speech to announce the intention to form the next government with the Labour Party he stated “We in New Zealand First believe that an economic correction, or a slowdown, is looming”.
Is he right? What is in store over the next couple of years?
There are signs that the business cycle is looking mature. The labour market is tight, with the unemployment rate at an 8½-year low, and broader capacity pressures are evident in a number of sectors. Productivity growth has been weak, resulting in disappointing per capita growth performance (currently just +0.5% y/y). Household debt has risen to record levels as a proportion of income, courtesy of a house price boom. All these are typical late-cycle phenomena and bring with them growth headwinds and vulnerabilities.
There are other challenges too:
- The housing market is cooling. Sales volumes are at the lowest levels since 2011, and house price growth has slowed. We are mindful of the risks of spill-overs to the likes of consumer spending and growth –that’s often been the historical experience.
- A number of the economy’s growth drivers have now peaked. The construction sector is grappling with capacity, cost and capital constraints. Net migrant inflows have started to slow. Even visitor arrivals growth has slowed as capacity constraints have bitten. While we do believe other growth drivers will emerge, transitions are often wobbly.
- A new political broom signals a change in economic direction. Change can certainly cause unease and trepidation.
The recent tone of economic data has become more mixed and in our view the chances of a growth hiccup have increased. However, we are optimistic that this will not turn into something longer-lasting, for a number of reasons.
- Structural metrics such as the current account deficit and net external debt are in far better shape than they have typically been at this point in the cycle. Credit growth has cooled, and the housing slowdown has been orderly.
- The global economic backdrop is solid. Geopolitical risks are heightened in a number of places and there are pockets of excess in financial markets, but right now the global economy is experiencing its strongest and most broad-based period of growth since the financial crisis. It would be unusual for the New Zealand economy to embark on an entirely different path.
- The terms of trade (the ratio of our export prices to import prices) is effectively at all-time highs. The benefit of this huge purchasing power gain is still flowing through and should provide a boon to national incomes.
- Over the past 12 months or so, banks have restrained credit as they have attempted to close a funding gap due to easing deposit growth but still-strong borrowing demand. That ‘gap’ has now closed a great deal, and so the credit headwinds should ease.
- Interest rates are low, and the combination of the strong export commodity prices, together with a lower NZD, is a supportive signal.
- The fiscal position is strong, providing the new Government with options. The fiscal stimulus over the next couple of years is expected to be large, particularly since it will put additional money in the pockets of those who are most likely to spend it.
- Underlying inflation pressures are currently low. We do expect more inflationary pressures to emerge from the likes of the labour market in time. This is in part due to skill shortages, but also policy changes such as minimum wage hikes. However, this is something that will likely occur gradually. Monetary policy tightening looks some time away, and we expect it to be cautious.
Accordingly, we retain a broadly positive view towards medium-term growth prospects. We see growth averaging 2½-3% over the next couple of years. But it is fair to say that it is quite a nuanced story. There are challenges and headwinds to navigate in the near term. And purely statistically, a slowdown is ‘due’. However, robust structural metrics, plus new growth drivers set to come online, give us optimism that if a near-term slowdown does eventuate, it should be modest and relatively short-lived.
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