NZ: The shifting landscape – Westpac

The past year has seen some big changes in the economic landscape, and further changes are on the cards over 2018, according to analysts at Westpac.

Key Quotes

“This week’s GDP report is expected to show that economic growth slowed to just 0.4% through the September quarter. In part, this slowdown reflects the impact of some temporary factors. Poor weather through the middle part of the year put a dampener on agricultural production. We’ve also seen earlier boosts to demand in the tourism and hospitality sectors fading following high profile sporting events in the first half of 2017.”

“However, even smoothing through those temporary disruptions, the New Zealand economy has lost some steam. We expect that GDP growth over 2017 as a whole will come in at just 2.4%. That’s down from 3% over 2016. And after adjusting for rapid population growth over the past year, we’re left with a picture of relatively flat per capita economic growth.”

“But while the pace of overall growth has eased off, the final months of the year have seen signs of resilience in some key parts of the economy. Most notably, the housing market has found a new (though likely temporary) lease on life, with house sales posting solid gains through October and November. We’ve also seen a re-acceleration in house price inflation in parts of the country including Auckland. Importantly, this resurgence in the housing market appears to have also given spending a shot in the arm, with electronic cards transactions rising by more than expected in November.”

“Increasing headwinds expected over 2018

• GDP growth is likely to remain fairly modest over the coming year. We’re forecasting economic output will rise by only 2.4% over calendar 2018.
• We think the Government is being far too optimistic about the outlook over the next few years. In particular, the HYEFU forecast assumes an acceleration in GDP growth to 3.5% over 2018, underpinned by firmness in both investment spending and household consumption. Both of those assumptions look doubtful to us. As well as the downside risks for the housing market and household spending highlighted above, businesses we’ve spoken with in recent weeks have told us that they are extremely nervous about the outlook. We expect that this will be a significant drag on investment spending and hiring over the coming year.
• If GDP growth doesn’t accelerate to the extent that the Treasury is projecting, the risk is that future revenue will fall short, requiring the Government to either rein in some of its spending plans, find additional sources of revenue, or abandon its commitment to reducing net debt so rapidly. This vulnerability isn’t unique to the new Government: we made similar comments at the time of the May Budget. And since our point of disagreement relates to the outlook for economic growth several years ahead, it’s likely that our concerns will remain for some time.”