ASB Quarterly Economic Forecast: Are we there yet?

  • We are still waiting for resolution of trade tensions and Brexit, and an end to NZ’s economic deceleration. 
  • Monetary policy has done some work to lift growth; the Government also has plenty it could do.
  • Australia hasn’t had a recession for 28 years, something NZ can actively aspire to.

At the beginning of the year, the various headwinds facing New Zealand's economy looked to be abating, however as 2019 draws to a close, it appears we aren't there yet.

The latest ASB Quarterly Economic Forecast shows despite issues including US-China trade tensions, Brexit and a stalling New Zealand economy, growth should be stronger.

ASB chief economist Nick Tuffley says to put this in perspective, per-capita GDP growth peaked at 2.3% for the 12 months ending June 2015. In comparison, the current forecast to June 2020 for per-capita growth may not exceed zero.

"Collectively there is more that can be done to haul New Zealand's growth back up to a more respectable rate," says Tuffley.

"The RBNZ has taken some action – and will do more in our view – which will support housing-sensitive activity and consumer spending. But the looming increases in bank capital requirements will progressively boost the price of credit and constrain its supply. And monetary policy is getting closer to the point where unconventional measures would need to be leaned on in any real crisis," says Tuffley.

A reasonable chunk of the softening economic performance was around companies' hesitancy to hire and invest – a result of the current uncertainty many were feeling, the report says.

There is an increased role for the Government to both directly boost demand and also help reduce the amount of uncertainty and caution that is holding businesses back according to Tuffley.

"Engaging heavily in two-way dialogue with industries, showing pragmatism, understanding, and a clear commitment to support industries through transitions may give greater comfort that the Government is working with business.

"With New Zealand's productivity having flat-lined in recent years, a work programme focused on boosting productivity would show a commitment to enabling businesses to grow as well as sowing the seeds for future prosperity. In December the Government will give its formal update on the fiscal and policy outlook, an opportunity to see how next year's Budget will frame up," says Tuffley.

International Outlook – Trade War impact passing New Zealand by

Trade war impacts are now more clearly showing up in hard data, however, this has yet to translate into a materially weaker New Zealand export sector. In fact, on balance, the New Zealand export sector continues to perform well, although Tuffley warns the sector perhaps most at risk from the global slowdown is tourism.

"The tourism boom is already showing signs of peaking, and the longer global growth remains below par, the bigger the risk that overseas arrivals tail off faster than we currently expect. But all up, New Zealand’s export sector appears to be largely riding out this global growth storm, says Tuffley.

According to Consensus Economics forecasts, growth in NZ's trading partners is expected to print well below trend for the next two years, with both Australia's and China's economies slowing.

"On a brighter note, the UK appears headed towards an orderly Brexit," says Tuffley.

On 28 October, the EU and UK agreed to a Brexit "flextension" until 31 January 2020. The "flextension" means Brexit can take place earlier on 1 December 2019 or 1 January 2020, if the withdrawal agreement is ratified by both main UK parties.

Meanwhile, a UK general election is set for 12 December and encouragingly no major UK political party has a hard‑Brexit platform.

Growth forecasts slashed

"We have revised our GDP growth forecasts significantly lower since our latest Quarterly Economic forecasts," says Tuffley.

"Although general business sentiment has been pessimistic over the past two years, it has only been more recently that we have seen tangible signs that businesses are facing material headwinds – raising concern about the economy's resilience.

"Since the start of 2019, firms have reported a fall in demand and a decline in profitability, and this weakness has been fairly broad-based across segments of the economy. Businesses have reacted by pushing pause on major investment projects and as a result business investment growth has stalled over the past year. To date, job creation has not yet been materially impacted and consumer demand has held up due to labour income growth,” says Tuffley.

"We continue to believe that low interest rates will stimulate economic demand and support a recovery in economic growth, with some green shoots already evident in interest-rate sensitive sectors of the economy, such as the housing market. But structural changes taking place in the finance sector (in particular the RBNZ's proposed changes to minimum bank capital requirements) are likely to impact credit availability, blunting the effectiveness of lower interest rates to stimulate the economy.

"We believe (like many) some additional targeted fiscal support will be required, but given the lags in implementing any fiscal boost we have pushed out the timing of our anticipated economic recovery," says Tuffley.

The latest ASB Quarterly Economic Forecast is attached and will be available online at https://www.asb.co.nz/documents/economic-research/quarterly-economic-forecasts.html

Other recent ASB reports covering a range of commentary can be accessed at our ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html

Media Centre Media Releases ASB Quarterly Economic Forecast - Are we there yet?