Economic - Commercial

STATE OF THE NATION - MARCH 2018

Economic Update from Liz Kendall – ANZ Senior Economist

The economy entered 2018 with more positive news in the foreground. The recent flow of data points to an economy that is doing relatively well.

• Data revisions imply the economy grew faster than initially estimated over recent years. Importantly, productivity growth has been stronger than previously thought – painting a picture that’s not so bad after all.
• Firms remain cautious, but surveyed business confidence has come off post-election lows. With activity indicators remaining robust, it appears the economy has navigated the spike in political uncertainty relatively well.
• Current activity looks healthy, with near-term indicators suggesting that the economy is getting on with it. GDP is growing at around-trend pace, after cooling from the stronger growth seen over 2015/16.
• Housing market activity has shown some signs of life, bouncing off low levels, perhaps on the back of mortgage rate falls.

Despite these positive signs, the economy is navigating some late-cycle headwinds and it is not firing on all cylinders (which would be unusual at this stage of the cycle anyway). Equally, it is not showing signs of rolling over.

Migration and construction – key drivers of recent strength – appear to have topped out. And late‑cycle challenges are tempering the outlook going forward. Capacity pressures, housing excesses and margin pressure will temper activity – and household debt is high. Even in the best‑case scenario, high household debt will constrain consumption growth and overall activity growth in the future.

That said, the current account is contained, the banking system is resilient, and credit growth is relatively subdued – the economy has strengthened its buffers against a bad scenario.
In fact, despite some challenges, the medium-term growth picture is positive, with stimulatory fiscal policy and supportive financial conditions both doing their part. The fiscal position is strong, providing the new Government with options – and those options will be exercised. The fiscal stimulus over the next couple of years will be large, particularly since it will put additional money in the pockets of those who are most likely to spend it. Prospects for household income growth are solid, given our expectation that wage growth is set to finally increase (albeit modestly). The high terms of trade will also boost national incomes. Interest rates are low and despite recent global financial market volatility, domestic financial conditions are supportive.

As conditions unfold, there are a couple of things we’ve got our eyes on:

• The housing market. We will be watching for signs of life in the housing market, but for now the housing market is steady as she goes. We will also be looking out for whether the recent market slowing is reflected in weaker consumption growth as people reassess their strained balance sheets without the prospect of easy capital gains.
• The impact of heightened policy uncertainty. We are reasonably agnostic on the new Government’s proposed policy platform overall, but change can be unsettling, leading to restrained spending and hiring decisions. We are assuming the decline in business confidence contains a protest element and that firms will eventually get on with it.

All up, the economic story is positive. We expect reasonable rates of GDP growth over the medium term, but achieving above-trend growth over the next few years will be a challenge – with population growth set to slow and a productivity miracle unlikely. We are not seeing the same degree of imbalances or inflationary pressures that have often been the catalyst for a sharper downturn, though.

We expect OCR hikes in time. But with evidence of a lift in domestic price pressures lacking, the OCR looks to be on hold for some time yet. Underlying inflationary pressures are low and are only expected to increase gradually. We expect wage inflation to eventually increase as skill shortages bite, which should see core inflation approach 2% over time. At the same time, we expect the NZD to face more downward pressure on narrowing interest rate differentials, which will also give inflation a nudge. But these forces are not evident right now – meaning that the RBNZ will take an extremely cautious approach to tightening policy for some time yet.

This material is provided as a complimentary service of ANZ. It is prepared based on information and sources ANZ believes to be reliable. Its content is for information only, is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to acting in reliance on it. To the extent permitted by law ANZ disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omissions by any person in relation to the material.