Second of Three Parts
ASB Bank, Auckland, May 15, 2018
Slowing construction growth and a patchy export volume performance were key elements of New Zealand’s economic growth slowdown.
Once accounting for prices, our strong Terms of Trade saw the nominal GDP and domestic income growth pick up.
Looking ahead, we expect strong income growth to be a key support for the economy, supporting a recovery in GDP growth to reach 3.4% annual average growth by the end of 2019.
Business confidence plunged following the 2017 General Election and change in Government.
Confidence level low
While a fall in business confidence is not unusual in the first term of a new Labour Government, current levels of confidence are nonetheless low and risk spilling over into weaker business investment and employment demand over the coming year.
We expect business confidence will recover, but a risk to our forecasts is that confidence remains low over the coming year, which may constrain economic growth.
The external outlook remains promising, with robust growth among key trading partners supporting our historically high Terms of Trade and the demand for exports.
The risk of an escalation in trade tensions between the US and China is not inconsequential, but we expect that cooler heads will prevail and negotiations between the two countries will see the threat of higher tariffs/less openness to trade recede.
Tourism remains strong
Tourism is one sector where demand is strong, but limited accommodation capacity is likely constraining growth, with the high (but easing) New Zealand Dollar a headwind for spending by foreign visitors.
Continued focus on boosting shoulder season demand and attracting higher spending tourists should continue to generate further growth in this sector.
Construction activity is likely to be at (or close to) peak levels.
The housing stock has not kept up with demand posed by increased population in Auckland and Wellington.
Increasing house building activity faces headwinds from limited construction sector capacity (particularly labour supply), rising construction costs, finance constraints and (anecdotally) higher land prices.
KiwiBuild will gradually ramp up, and a Government-backed programme may help to overcome some of these constraints, but some constraints will likely remain a binding limit on how much further residential construction activity can rise.
Immigration flow continues
Net immigration remains at very high levels, although it has started to show signs of turning with permanent and long-term departures from New Zealand picking up from low levels.
Nonetheless, arrival numbers remain at historically high levels.
With announcements yet to be made on the Government’s changes to migration policy, we have revised up our net immigration forecasts.
We continue to expect population growth to slow, weighing on New Zealand household spending growth and likely exacerbating labour shortages.
Household spending growth is expected to slow, reflecting slowing population growth and less support from new housing construction (which has boosted demand for household durable goods).
We expect per-capita household demand to recover over 2018, boosted by increased wage growth. Wage growth is a major determinant of domestically-generated inflation.
To date, wage inflation has remained surprisingly muted considering the tight labour market. Nevertheless, we expect wage inflation to start to lift, in part due to the series of large increases in the minimum wage expected over the next four years.
Editor’s Note: The above is a slightly edited version of the Quarterly Economic Forecast of ASB Bank, one of the largest commercial banks of New Zealand. We will publish one more part of the Forecast shortly.