STATE OF THE NATION – SEPTEMBER 2019
Economic Update from Miles Workman – ANZ Senior Economist
The global growth outlook remains fragile. Growth among New Zealand’s key trading partners has slowed. And while weakness has largely been concentrated in trade and manufacturing, with softer-than-otherwise business investment also a feature, things could get rather ugly if global labour markets and household sentiment and spending follow suit.
The starting gun for the race to the bottom for global central banks was fired when the RBNZ cut the OCR in May. Since then the Reserve Bank of Australia have cut their cash rate to 1.0%, the Federal Reserve have eased 50bps, the European Central Bank has cut interest rates and resumed asset purchases, and China has bumped up fiscal stimulus and allowed the yuan to depreciate. And it would seem further global stimulus is just a matter of time.
Turning to the domestic picture, New Zealand’s export prices have been relatively robust in the face of slowing global activity. Yes, commodity prices are down a little, as are tourist numbers, but a lower NZD is providing some offset. However, with the global outlook so uncertain we think exporters are going to remain cautious, implying constrained investment spending and possibly a phase of deleveraging.
The domestic side of the New Zealand economy has been losing steam for a while now, with annual growth slowing from around 4% in late 2016 to 2.1% by Q2 2019. Forward-looking indicators are yet to provide convincing evidence that activity is stabilising. We expect GDP growth will remain subdued into 2020, troughing at 1.9%. Thereafter, we’ve pencilled in a gradual acceleration in economic activity that will see annual growth lift towards 2.5% by the end of 2021.
Households have remained in good stead, evidenced by the modest tick up in wage growth in Q2 and fall in the unemployment rate (from 4.2% to 3.9%), but the labour market generally lags economic activity. And more recently, survey data suggest that both the construction and manufacturing sectors are reducing headcount, which doesn’t bode well for employment growth over the second half of the year. Consumer confidence is not looking quite as bullet-proof as it was.
Overall, the risk that slowing economic momentum is a little more persistent than we’ve pencilled in is intensifying as data flow rolls in (such as the ANZ Truckometer). But if this is the case we still think there are enough supports out there to put a floor under things (unless something drastic happens of course – commodity price crunches and drought have been the typical historical catalysts for a New Zealand recession). That said, if the gradual pick-up in growth does occur as we expect, we think it will be hard won as the tailwinds of lower interest rates, recent NZD depreciation, a tight labour market, and a little extra fiscal stimulus will still need to contest with stubbornly low business sentiment (which we suspect is weighing on investment and employment decisions), slowing population growth, anaemic productivity growth, and a softer housing market.
All up, the New Zealand economy has slowed, but further downside risks are certainly heightened. And if risks are skewed to the downside around our expectations for a relatively modest growth recovery, then they are skewed even further south compared to the RBNZ’s optimistic-looking August MPS forecasts. By November, we think the evidence will be clear that growth is struggling to accelerate as the RBNZ expects and that they will cut the OCR to a new record low of 0.75%. But we think there’s even more in the pipeline. We also expect that the RBNZ’s hand will be forced in 2020, given low and falling inflation expectations and soft global and domestic growth. We’re picking further OCR cuts in February and May to take the OCR down to 0.25%. If things were to really deteriorate, there’s plenty of fiscal headroom for government to step up to the plate and lean against the wind with a little extra spending or tax cuts.
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