Opportunity & Uncertainty in Post-Election Economy

Wednesday, 15 November 2017, 8:23 am
Press Release: ASB Bank

Opportunity & Uncertainty in Post-Election Economy

• Election-related uncertainty to be short-term only

• Rapid minimum wage increases to boost NZ wage growth

• Housing market to remain cool with investors more cautious

ASB economists expect election-related uncertainty to dampen growth over the second half of the year, but say this will be short lived only and remain positive on the growth outlook for New Zealand.

Economic growth is expected to firm to around 3% by the middle of 2018, according to the bank’s Quarterly Economic Forecasts.

ASB chief economist Nick Tuffley says the change in direction with a new Government inevitably brings about a period of uncertainty to the business environment, with the risk decisions get deferred for a period.

“But we emphasise that any uncertainty is going to be short-lived. It’s important to remember the underlying economic picture is what will have the dominant influence on the business environment. Local and overseas influences point to overall economic growth around 3%, which is still pretty decent,” Tuffley says.

“Even with some looming changes to the Reserve Bank’s policy target, interest rates are still likely to be low for some time, certainly over the next year.”

Mr Tuffley says some ASB Economics forecasts have been tweaked to account for likely policies of the new Government. Key changes so far include a sharper fall in net migration, faster wage growth and slightly weaker house prices.

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“While it’s early days for the new Government, there are some broad policy implications that will influence the economy – inbound migration will slow more rapidly, cooling population growth,” Tuffley says.

“That means overall economic growth will not be quite as strong, although there will be some offset from stronger government spending. The policy balancing act will be reducing the inflow without making it impossible to fill some job vacancies for which migrants are the only real option.

“Minimum wage increases will be more rapid than in recent years, and likely to flow over to other wage rates if businesses want to retain a degree of relativity to the minimum wage. For small businesses, these wage pressures can be hard to absorb. It will really put the focus on seeking productivity gains to help ‘pay’ for the wage increases.”

Housing outlook – key area of uncertainty

Housing will see different influences under the new government, Tuffley says.

“Future tax changes will make property investors more cautious, with flow-on effects to business supporting investors and real estate. But at the same time, the Government will be pushing hard to build more homes in a number of main centres around the country.

“We expect housing construction to continue to strengthen in Wellington and remain steady in Auckland, as ongoing housing supply shortages underpin construction demand in these cities.”

Meanwhile, house-building demand is likely to ease from cyclically-high levels throughout the rest of the country as population growth slows.

“The Labour/NZ First Government housing policies are likely to result in slightly less pressure on house prices than we previously expected. Nonetheless, we continue to expect the physical shortage of housing in Auckland and Wellington to support house prices.”

ENDS

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