NZ: Moderate growth to continue - Westpac

Analysts at Westpac explain that recent indicators have provided more evidence of how New Zealand’s economic growth has throttled back in the last year. It’s by no means a gloomy outlook for the economy and Westpac expects continued moderate growth over the next few years.

Key Quotes

“Last week we received the last major inputs for June quarter GDP, which will be released on 21 September. Two of them in particular were on the softer side, removing what we felt was an upside risk to our forecast of 0.8% growth.”

“If June quarter GDP growth reaches 0.8% as we expect, that would look reasonable on the face of it.”

“However, a continuation of the same pace of growth as before doesn’t square with official forecasts of a rapid pickup over the next couple of years. We expect the economy to grow by about 3% over the next year; the Treasury’s Pre-Election Update projected a lift in growth to 3.5%, while the Reserve Bank is even more optimistic at 3.8%. Moreover, much of the difference in views relates to growth in residential building, the very area where growth is falling short of expectations.”

“The absence of an acceleration in growth would be problematic for both the government and the Reserve Bank. For the government, a shortfall in GDP growth would risk a similar shortfall in the expected tax take over the coming years, which in turn affects the scope for new spending. (To be fair, it is nominal GDP growth that matters most for the tax take forecasts, and the near-term outlook for that is reasonably strong thanks to the rise in the terms of trade.)”

“The RBNZ recognises that a sustained return to the 2% inflation target will require a lift in home-grown inflation, via strong economic growth. If that expected lift in the growth rate doesn’t come about, the return to the inflation target is likely to be delayed further, and interest rates will need to remain low for even longer. We see little case for an OCR hike within the next two years, in contrast with market pricing for a hike by September next year.”