Failure to launch?

  • The economy looks like it will fail to rebound significantly over the next year, with growth to lift only slightly.
  • Ongoing domestic malaise remains the gravitational drag, though global headwinds are intensifying.
  • Monetary policy may test its practical limits, which would bring quality Government action to the fore.

The expected rocket back to growth for the New Zealand economy has stalled somewhat, despite a number of factors continuing to propel it forward, according to the latest ASB Quarterly Economic Report. 

Although near-record Terms of Trade (courtesy of high export commodity prices), strong population growth, and even-lower interest rates are keeping momentum up in the economy, domestic headwinds and growing global ones appear to be taking their toll. 

"Global prospects are for the slowest growth since the Global Financial Crisis, and the risks have risen sharply recently," says ASB chief economist Nick Tuffley.

"Donald Trump has slammed further tariffs on China, reducing the chances of a ceasefire anytime soon. Meanwhile, newly-elected UK PM Boris Johnson is ordering 'Exit' signs in bulk to illuminate his negotiating stance with the EU. The last thing the global economy needs is a bad hair day that a comb-over won't fix," says Tuffley.

Closer to home, businesses remain in a funk, with confidence still falling. Tuffley says the combination of domestic and global uncertainties mean businesses are wary of putting their hands in their pockets.

"Capital spending is soggy outside of anything involving construction, but trading conditions are simply not as bad as surveys suggest. Businesses need to focus on the key levers of their performance that they can control. The challenge is that we need more investment to improve our becalmed productivity, and deliver the strong economic and wage growth that is key to long-term prosperity," says Tuffley.

According to the report, it wasn't all doom and gloom, with monetary policy helping to shore up growth and early signs of response in the housing market. With the Reserve Bank of New Zealand openly talking about the potential for negative interest rates, Tuffley says now is the time for the Government to prepare quality spending and investment plans as contingencies.

"The Government could line up targeted welfare spending/tax cuts aimed at giving the economy a cyclical boost. The country is also crying out for infrastructure and policies that would jump-start productivity. With Government debt low and its borrowing costs even lower, the Government is well-placed to lend a hand, if needed," says Tuffley.

International Outlook - Trade War fears crystallising

The global growth slowdown has become even more entrenched in recent months. Trade war impacts are now more clearly showing up in hard data, with forecasts for New Zealand's trading partners continuing to be revised down. 

"According to Consensus Economics forecasts, trading partner growth is expected to print well below trend for the next two years," says Tuffley. 
"Growth forecasts for the Australian economy have also been pruned, although recent signs of a bottoming in the Sydney and Melbourne property markets may help support analyst forecasts for a recovery in the Aussie economy next year.

"In contrast, the slowdown in the Chinese economy looks set to resume and Brexit continues to hang over the UK. Despite the global gloom, the country's exports sector is expected to hold relatively well," says Tuffley. 

The New Zealand economy under pressure

New Zealand economic growth has slowed since mid-2018 and is likely to remain subdued for the remainder of 2019, according to the ASB Quarterly Economic report, although lower interest rates are expected to support a recovery in economic demand in 2020.

"Business confidence has remained persistently weak over the past 18 months, with key measures of business activity pointing to economic conditions deteriorating in recent months. 

"A key puzzle over the recent economic cycle has been subdued price inflation relative to capacity measures, in particular relatively subdued wage growth despite the steady decline in the unemployment rate," says Tuffley.

Recent ASB analysis suggests that, like Australia, there may be greater slack in the NZ labour market that previously believed.  Furthermore, with labour demand cooling as business confidence remains weak, the degree of slack in the labour market may start to increase going forward.  

"On a more positive note, recent declines in mortgage rates are likely to stimulate the housing market in coming months, and New Zealand commodity exports continue to perform strongly, for the most part," says Tuffley.

The latest ASB Quarterly Economic Forecast is 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

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Media Centre Media Releases ASB Quarterly Economic Forecast August 2019