Looming economic risks for NZ?

3 February 2017

Media release for immediate use

Looming economic risks for NZ?

The New Zealand economy has entered 2017 in good spirits. Infometrics’ latest forecast, released today, predicts GDP growth over the three years to June 2019 will average more than 3.0%pa. However, Infometrics Chief Forecaster Gareth Kiernan believes the solid outlook for growth masks several risks that hang over the economy.

“Mortgage holders in Auckland look particularly vulnerable to even modest interest rate rises that are likely to occur in the next 2-3 years,” Mr Kiernan said. “Debt-servicing costs in the city now take up a greater proportion of income than in 2007, when mortgage rates reached 8.7%. A future rise of 1.5-2.0 percentage points in mortgage rates would clearly stretch many borrowers in Auckland and squeeze potential buyers out of the market.”

Infometrics predicts that wholesale interest rates will gradually rise further over coming months and that the Reserve Bank will start increasing the official cash rate by mid-2018. “Net migration and population growth will be easing at the same time as interest rates start to rise, and this cocktail could be the catalyst for a housing market correction,” said Mr Kiernan. “Apart from the stresses on the market in Auckland, underlying demand conditions in some other regions do not justify current high prices, and we see scope for a 12% drop in property values by the end of 2020.”

Despite the unemployment rate edging up to 5.2% in data released this week, the labour market has been tightening across the board. The capacity constraints that have previously been most intense in the construction and tourism sectors are becoming more widespread. Infometrics expects to see increased wage pressures as firms battle harder to attract and retain staff, with the unemployment rate dropping back below 5.0% in 2017 and continuing to decline over the next two years.

Heightened political uncertainty also has the potential to derail New Zealand’s growth train. At this stage, the main threat to New Zealand from US President Trump’s policy agenda appears to be potential trade barriers against China.

“Mr Trump has talked about 45% tariffs on Chinese imports, which would reduce American demand for Chinese products, dampening economic growth in our largest export market and undermining New Zealand’s export incomes,” said Mr Kiernan. “President Trump’s proposal is a significant threat to Chinese and global economic growth, and New Zealand would not be able to dodge the flow-on effects over the following couple of years if trade barriers between China and the US were implemented.”

“Closer to home, a change of government or a shift in the balance of power after New Zealand goes to the polls on September 23 could also have affect our medium-term economic outlook,” said Mr Kiernan.

ENDS

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