Economic growth continues to slow, pick-up expected

Tuesday, 16 February 2016, 12:11 pm
Press Release: ASB Bank

Economic growth continues to slow, pick-up expected over 2016

• Economic growth slows, expected to bottom out above 2%.

• Lower interest rates and NZD should support a pick-up over 2016 and 2017.

• Further interest rate cuts will reduce inflationary risks.

New Zealand’s economy has slowed, largely due to the impact of weak dairy prices and slower construction growth, but should pick up during the year with support from lower interest rates and NZD, according to ASB forecasts.

The bank’s Quarterly Economic Forecasts indicate economic growth continuing to slow to a trough of 2.2% over the first half of 2016, despite record-high net migration boosting population growth by 2% over the last year.

ASB chief economist Nick Tuffley says at that level, population growth is accounting for much of NZ’s growth at present.

“On a per-capita basis, there has essentially been no growth over the past year.

“We do expect growth will stabilise then recover over 2016 and 2017,” Mr Tuffley says.

“Declines in interest rates and the NZD over the past year will help support growth – and further rate cuts later this year should provide an extra boost, ensuring inflation lifts more firmly back into the RBNZ’s target.”

Falling dairy incomes remain the main headwind for the economy, while tourism is the notable bright note, with strong growth in visitors and in per-person spending.

Housing trends over the coming years remain a key uncertainty. In Auckland, initial signs suggest the newly-imposed RBNZ’s investor loan-to-value ratio restrictions and tax rules are having an impact on activity and house prices. However, there are some early signs that perhaps the initial slowdown was a knee-jerk reaction.

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International outlook

Global financial markets have made a rocky start to 2016. Concern about China’s economic growth, in particular, has spilled into sharemarkets foreshadowing what is shaping to be a bumpy ride this year for the global economy. Europe’s banks have come under closer scrutiny.

But New Zealand’s direct trade links to the relatively robust Chinese consumer should limit the impact of slowing Chinese growth on NZ’s exports.

One direction for interest rates and exchange rates

Although the RBNZ appears reluctant, ASB expects the RBNZ to cut the OCR further over the course of 2016.

Teamed with global growth concerns and interest rate increases from the US Federal Reserve, this should renew the downward pressure on the NZD/USD over the coming months.

ENDS

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