Building boom masks economy’s underlying problems

Despite increasing storm clouds and general concern about the New Zealand economy’s prospects, Infometrics’ latest economic forecasts show GDP growth holding up well throughout the next year. The economic consultancy predicts 3.1% growth in the year to June 2020. A recent resurgence in residential building consents, particularly in Auckland, is pivotal to that outcome.

“Recent residential activity contrasts with the soft consent numbers that prevailed in mid-2018,” says Infometrics’ Chief Forecaster Gareth Kiernan. “Doubts remain about the industry’s capacity to lift output much further from current levels, but the volume of work in the pipeline will buoy economic activity over the next 12 months.”

Household spending has also maintained its strength in recent quarters, despite patchy consumer confidence and the softening housing market. Even with spending growth easing throughout the next two years, consumers are set to make a bigger contribution to near-term economic growth than was previously anticipated.

One factor that will have little effect on economic outcomes is the Reserve Bank’s surprising change of stance on monetary policy. Following last month’s statement by the Bank, Infometrics now expects the official cash rate (OCR) to be lowered to 1.5% in May and 1.25% before the end of this year. “In 2016, the Reserve Bank’s OCR cuts had virtually no effect on retail rates, particularly the floating mortgage rate,” says Mr Kiernan. “We expect a similar result this year, meaning that the Bank’s actions will do little to stimulate more consumer spending or business investment activity.”

New Zealand’s steady performance in the short-term should not distract from more fundamental issues faced by the economy, as highlighted by Infometrics in previous forecasts. The biggest question mark hangs over the economy’s medium-term growth prospects. A lack of business investment, the continually tight labour market, and poor labour productivity growth all create serious doubts about potential economic growth. The slowing global economy and overvalued housing market also point towards more difficult growth conditions in coming years.

“The New Zealand economy is lacking the investment needed to drive innovation and continued strong growth,” says Mr Kiernan. “We predict that GDP growth will average just 1.5%pa over the three years to March 2024, less than half the average rate maintained throughout the last six years.”

ENDS

For more information contact:

Gareth Kiernan

Chief Forecaster, Infometrics

email: gareth.kiernan@infometrics.co.nz

phone: 021 119 3876