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ASB Quarterly Economic Forecast February 2019

Wednesday 20 February 2019

It’s getting untidy

• New Zealand growth outlook is reasonable supported by strong fundamentals. • Risks loom large amidst signs of a global economic slowdown.

• New Zealand Dollar expected to come up smelling like roses in Year of the Pig.

The latest ASB Quarterly Economic Forecast reveals the world could use the Maire Kondo touch as things get messy and cause winds-of-caution to swirl both locally and globally.

ASB chief economist Nick Tuffley says the earlier hopes that the economy was going to slip into some summertime stability have faded fast as the mornings get darker.

“We expected the New Zealand economy to regain a bit of momentum after it slowed noticeably over the second half of 2018, but with the risk rising of weaker global growth it is fair to say we’re now less confident that growth will pick up in 2019.

“Sparking joy is the fact that we continue to see strong underlying fundamentals supporting New Zealand economic growth, including high Terms of Trade, low interest rates and our expectation of higher wage growth over the coming year, with an additional boost stemming from minimum wage increases.

“But not sparking joy are the signs that the global economy is slowing and the potential influence of politics on economic activity almost everywhere is making the outlook messy,” Tuffley says.

Risks loom large amidst signs of global economic slowdown ASB Economists would rather say thanks, but no thanks, to a stuttering global economy. According to Consensus Economic forecasts, New Zealand’s trading partners are likely to grow at below-average rates over both 2019 and 2020.

“2019 Consensus Economics forecasts put our trading partner growth at 3.7%, down from 3.8% three months ago and 3.9% three months prior to that. This shows the risks to global growth that we noted repeatedly over 2018 have now crystallised, albeit still modestly at this stage,” Tuffley says.

Causing concern for ASB Economists are the US-China trade negotiations to avert tariff escalation which are yet to come to a positive conclusion.

“This is prompting a weaker growth outlook for our key trading partner China, which in turn is filtering down to our other trade partners in the Asia-Pacific, notably Australia,” Tuffley says.

In the UK, the Brexit woes continue and activity in the Eurozone has noticeably slowed, with Germany narrowly avoiding dipping into recession while Italy was not so lucky.

“That’s seen central banks called into action. Notably the US Federal Reserve (Fed) has moved to a neutral bias. Accordingly, we now expect the Fed to keep its interest rate unchanged over 2019 and 2020,” Tuffley says.

New Zealand Dollar expected to come up smelling like roses in Year of the Pig The ASB Quarterly Economic Forecast shows ASB Economists have changed their currency forecasts and are expecting the New Zealand Dollar (NZD) to strengthen against our trading partners.

“The NZD is expected to remain resilient over the next few years, given the generally-solid NZ outlook, strong NZ public finances, our persistently-high Terms of Trade and continued investor interest in NZ assets. We expect the NZD to progressively strengthen against the US Dollar – reaching 0.75 by the end of 2022,” Tuffley says.

ASB economists also expect the NZD to hold onto its strength against the Australian Dollar given the stronger outlook for our Terms of Trade and sounder nationwide housing market outlook.

“We see the NZD ending 2022 at around 97 Australian cents, but still believe that the parity-party champagne should remain on ice for now,” Tuffley says.

The latest ASB Quarterly Economic Forecast 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 @ASBBank @ASBMarkets www.asb.co.nz


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