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ASB Quarterly Economic Forecasts: Big wheels keep on turning

Media release
ASB Quarterly Economic Forecasts August 2017

Big wheels keep on turning
• Economic fundamentals are the big wheels keeping the global economy turning
• Domestic growth has much to do with people, with exports also faring well
• Housing market has cooled off, with a soft landing underway in Auckland

ASB economists continue to forecast a healthy economic growth outlook for New Zealand, and it’s migrants and tourists that are driving the momentum.

Economic growth is expected to increasingly gain momentum over the rest of 2017 and into 2018, according to the bank’s Quarterly Economic Forecasts.

ASB Chief Economist Nick Tuffley says net migration and tourism are at record highs and construction, a key driver of growth, is directly benefitting from greater numbers of people.

Strong population growth is also supporting domestic demand and consumption, a key driver of growth in Q1, shows no signs of abating.

“People are keeping construction sector booming and the tills ringing in shops, and we’ve just experienced the feel-good effect of sports tourism on the back of the Lions’ tour,” Tuffley says.

“With people power behind us we are expecting GDP growth to average 2.7% over 2017 before lifting to a peak growth rate of 3.7% over 2018 and 2019.”

Well diversified economy

Outside tourism, the export sector continues to shine.

The dairy sector has had a shot in the arm with Fonterra’s forecast of $6.750/kg for the new dairy season, in line with ASB’s long-held view, while the broader agriculture sector is doing well.

“It’s hard to argue with the solid foundations for growth and we continue to expect economic growth to increasingly gain momentum over the rest of 2017 and into 2018,” Tuffley says.

Goldilocks conditions for business

Typically, a certain level of inflation and higher interest rates could be expected hand-in-hand with a healthy economic growth outlook and strengthening economic activity.

“But our forecasts actually have inflation dropping and the Official Cash Rate on hold at a record-low of 1.75% until early 2019,” Tuffley says.

“That’s a Goldilocks mix of conditions for businesses: steady growth, steady inflation and low interest rates.”

The New Zealand Dollar will remain well supported by increased global investor demand for New Zealand assets and the country’s high Terms of Trade (high export prices relative to import prices), which is expected to set a new record high this year.

Housing market slows

One part of the economy that is losing steam is the housing market, particularly in Auckland, where house sales prices have fallen by about 30% over the last year, while homes listed for sale are now 66% higher.

Affordability challenges, the Reserve Bank’s added loan restrictions, lifts in mortgage rates and reduction in the ‘fear of missing out’ will be key drivers of the slower market conditions, Tuffley says.

“In the short-term, would-be sellers will adjust to the softer market by being more realistic about the price their home will sell for, and others who don’t need to sell will pull out of the market or simply not list.
“Longer-term however, Auckland’s shortage of homes to live in will keep a floor under the market.”

International outlook

“The world economic outlook for 2017 has held up so far this year, despite political developments, and the 2018 outlook is even hinting at improvement,” Tuffley says.

Importantly for New Zealand, US President Donald Trump’s trade protectionism bark continues to be worse than his bite, and the recent slowdown in US inflation has led ASB Economics to change its US interest rate view.

“We have delayed this year’s expected interest rate hike to December, from September previously. Also, we expect only one additional hike in June 2018, whereas we had previously expected three additional hikes.”

© Scoop Media

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