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.
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:
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.
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