19 June 2015

Overhauling the economic growth menu

The New Zealand economy has drawn praise from connoisseurs around the world over the past year, with a perfect balance of ingredients pushing GDP growth above 3%pa. Migrants have come from far and wide to sample our fare, while bubbles have continued to flow on the party circuit for construction and housing market participants. Although the regions have kept the pantries well stocked with fresh primary produce, critics claim that our dairy products will struggle to cut it against a growing supply of European milk, and so must now be priced down accordingly. Given these low dairy prices, at a time when growth in residential building consent numbers in Canterbury is being removed from the menu, economic growth is set to cool. We forecast that GDP growth will reach an eight-year high of 3.7%pa in the September quarter, but be turned down to a simmer after that.

Fearing these cooler conditions could unbalance the development of flavours in the growth broth, the Reserve Bank has recently decided to cut back on spice and reduce the official cash rate to 3.25%. This move is not without its short-term risks to prices, particularly if more people select the Auckland housing market to add some fat to their investment portfolios. However, Head Chef Wheeler is confident that the economy’s plentiful and diverse workforce means that the economy can keep cooking at a reasonable pace, without these price pressures becoming too persuasive. Furthermore, plans are in the wings for a special menu to ensure that Auckland property investors maintain a diet that won’t upset the country’s sensitive financial digestive system.

Despite Head Chef Wheeler’s best efforts to shore up demand for the status quo in the short-run, our forecasts still show economic growth cooling to 2.3%pa by the end of 2017. This cooling occurs even as a scaling up of construction activity in Auckland offsets a winding down of the Canterbury construction party. Disappointingly, this transition is likely to be served with a side of unsavoury pressures on building costs.

Consumers and businesses’ appetites to spend and invest will gradually fade over the forecast period. To prevent any capacity going to waste, our economy will need to overhaul its balance of ingredients over the longer-term towards more of an export focus. Pressure for a change in diet will become increasingly acute as an expanding current account deficit forces out the belt buckle a couple more notches. It may take a while for everyone to acquaint their palates to the new flavours, but we do see scope for an increasing focus on service exports and a recovery of goods exports, particularly as the New Zealand dollar depreciates. Even so, GDP growth is still forecast to have slipped to a lukewarm 2.0%pa by March 2020.

The comprehensive report and data tables underpinning Infometrics July 2015 economic, building, and transport forecasts are available now to paying subscribers.

ENDS

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