Our Take - Fake Plastic Trees
“A green plastic watering can, for a fake
Chinese rubber plant, in the fake plastic
We’ve lowered our Kiwi growth forecasts.
• After a few good years, the outlook for global growth has turned south, again. The weight of ageing demographics, fiscal austerity, regulation and populist protectionism overwhelms.
• The failure to generate consistent and prolonged nominal growth has uneased policymakers into easing. Interest rates are falling further, and fast.
• We’ve revised down our growth forecasts. Because the risks we have been wary of are coming to fruition. The RBNZ are likely to cut to 1.25%, and we still believe there’s a 40% chance of a move to 0.75%.
The NZ economy has slowed much faster than expected. Growth hit 2.3%yoy to end 2018, down from 3.4%yoy a year earlier. And we expect growth to slow to just 2%yoy in 2Q 2019. The economy is now growing below its potential – a key concern for the RBNZ in its seemingly perpetual struggle to lift inflation back up to its 2% target midpoint. Businesses are reluctant to invest, the housing market has cooled, and a deteriorating global outlook hangs over the NZ economy.
Kiwi companies remain in the doldrums, at least on surveyed paper. Firms have effectively been in a lugubrious mood since the 2017 general election, with Labour Pains . We are now seeing the consequences of an extended period of uncertainty, and low confidence. Firms are reluctant to invest, cautious in their hiring, and struggling to pass on rising costs to customers. The ratcheting up of the minimum wage, and the pass-through to higher paid workers, is one such cost. Consequently, profitability is taking a hit. And the outlook concerns many. Offshore, the global outlook has deteriorated. The IMF has revised down its growth forecasts. The US and China continue to wage a trade war, with no resolution in sight. Brexit drags on with deadline slippage ongoing. The failure to generate persistent nominal growth has uneased policymakers into easing.
Central banks around the word are responding. Here in NZ, the RBNZ cut the OCR to a new all-time low of 1.50% in May. And we don’t think the Bank will stop there. We expect the RBNZ to deliver another cut in August to 1.25%. And we still believe there’s a 40% chance the RBNZ is forced to keep going to 0.75% (see our markets report Blood, Sugar, Brex-Magik: markets high on risk ). The policy action is likely to support growth, we hope. Lower interest rates, and no CGT, will support the Kiwi housing market. But we are not convinced it’s enough to stimulate investment, yet. Confidence is key, and confidence is lacking.
We have lowered our growth forecasts for the Kiwi economy. We now see growth peaking around 3.4%yoy in 2021. In our last forecast update in November, (see Hood the hawks: the outlook is strong but uncertain. The RBNZ have released the doves ), we had a healthier forecast peak of 3.8%yoy in early 2020. Our forecast growth is now lower, for longer. To get growth back above 3%, help is needed. Much of our forecast growth comes from government (fiscal) initiatives. But more fiscal investment is needed in the outer years, beyond 2020/21. NZ’s elevated terms-of-trade should cushion the export sector for the time being. But slower global growth may lower our export prices in time.
Monetary policy is (again) called upon to support growth.
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