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ASB Quarterly Economic Forecasts May 2018

EMBARGOED UNTIL 5AM, WEDNESDAY 16 MAY 2018

Proceed with less caution

· Local business still not so sure the Government has ‘got this’.

· Escalating trade tensions something for the export sector to watch.

· Rising costs and changing regulations are risks for construction activity.

ASB economists are urging the New Zealand business community to put on more rose-coloured glasses and stop deferring decisions or risk stunting economic growth.

It comes on the back of the latest ASB Quarterly Economic Forecasts, which reveal New Zealand’s economic outlook is still a fairly healthy one, despite business confidence still wallowing in a post-election slump.

ASB chief economist Nick Tuffley says, positive thinking is key because New Zealand’s economic growth is actually expected to gradually accelerate to 3.4% by the end of 2019.

“It’s understandable the change of government has created uncertainty while key policies are fleshed out. But despite the genuine concern felt by many, we would like to see more recovery in sentiment soon because New Zealand continues to enjoy some decent economic conditions.

“For example, the terms of trade are at a record high, emphasising the strong global purchasing power of what we export. Interest rates are set to remain low, which will support the cash flows of businesses and household borrowers. Net migration inflows are above average. Plus, accelerating wages will support consumer spending growth,” Tuffley says.

Mr Tuffley believes the government has to play its part too by providing as much certainty, assurance and rationale as possible around government policies, which will help mitigate the risk of weak business confidence constraining economic growth.

Strong global demand but trade tensions loom a little larger

“A flurry of tit-for-tat tariffs between the US and China has put the world on edge. If future negotiations don’t resolve the tensions, and instead the protectionism escalates and spreads, this could have an impact on global growth putting New Zealand’s exports at risk. However, the volume of trade potentially affected by tariff increases is very small.

“If you put the US - China tensions to one side, the global economy is continuing to perform well. The Eurozone surged into the end of 2017 with annual GDP growth hitting 2.5%, the fastest growth rate since 2007. Plus, the Australian economy continues to perform well thanks to higher commodity prices and firm non-mining investment intentions sending positive signals for future economic performance. New Zealand is set to benefit well from this continuing strong global demand,” says Mr Tuffley.

Constraints limiting Construction sector growth

The ASB Quarterly Economic Forecasts shows New Zealand construction activity is likely to be at, or close to, peak levels, and ASB economists believe constraints pose a very real threat to just how much further residential construction activity can rise.

“We take it as read that the housing stock has not kept up with demand in Auckland and Wellington, but increased house building activity faces headwinds from limited capacity, particularly in terms of labour supply, rising costs, financial constraints and (anecdotally) higher land prices, plus on-gong regulatory hoops.

“KiwiBuild will gradually ramp up, but even then it will face the same issues, which puts the onus on adopting more productive and innovative ways of developing housing.” Yet, Mr Tuffley admits this evolution will take time.

ENDS

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