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Fitch expects slower GDP growth than Treasury

Monday 14th January 2019

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New Zealand’s economy will likely grow at a slower pace than Treasury is forecasting due to weak business confidence and declining consumer confidence, according to Fitch Solutions Macro Research.

“We expect growth to slow due to continued weak business and consumer sentiment which will weigh on investment and private consumption growth, Fitch says.

It is forecasting tax and other government revenue to rise 5 percent this year and 4.5 percent next year, well below Treasury’s latest forecasts for growth of 5.7 percent and 5.5 percent respectively.

“Our forecasts are slightly lower than the Treasury’s estimates, given our slightly less sanguine view of the economy,” Fitch says, emphasising that this view is independent of Fitch Ratings and that the two arms of Fitch don’t share data or other information.

“We forecast real GDP growth to come in at 2.6 percent in 2019 and 2.3 percent in 2020 compared to the Treasury’s more bullish forecasts of 3 percent and 3.2 percent respectively,” it says.

That’s despite Fitch expecting government spending to rise.

Noting the priorities the government outlined in December, it says social security, welfare and healthcare will remain the largest components of government spending with welfare accounting for 29 percent of total spending and healthcare at 16.1 percent.

“In particular, we forecast the share of the pensionable population – those aged 65 and above – to rise to 20 percent over the next decade from 15.6 percent in 2018,” it says.

While spending will rise, money coming into the government’s coffers will be less than previously forecast.

It noted that business confidence remains on a downward trend with a figure of negative 37.1 points in November, down from positive 24.8 in June 2017.

“Continued weakness will likely have a direct effect on corporate tax revenue which makes up 14.8 percent of the country’s revenue.”

Consumer confidence has also fallen to 115.4 points in October from a peak of 128 in March last year “suggesting the potential for lower consumer spending over the short term, especially as New Zealand’s household debt remains high at slightly more than 120 percent of GDP,” Fitch says.

“The slowdown in consumer spending could also weigh on GST collection, which makes up 24.3 percent of total revenue.”

Fitch’s dimmer view of New Zealand’s growth prospects is why it expects the government’s fiscal surplus will likely shrink to 0.8 percent of GDP this year and to 1.2 percent next year from 2.1 percent in the year ended June 2018.

“This is on the back of the country’s slowing economic growth which we expect to weigh on revenue collection over the coming quarters,” Fitch says.

Previously Fitch had been forecasting a surplus of 2 percent of GDP and 1.9 percent for this year and next respectively, although its forecast for the current year’s surplus is above Treasury’s 0.7 percent of GDP forecast.

In any case, Fitch expects government debt levels will remain healthy.

“It is one of the least indebted countries among OECD economies with total gross debt of 30.6 percent in 2018, comfortably below the OECD average of 73 percent and on a declining trend.

“As such, there is ample buffer for policymakers to enact expansionary fiscal policy to support the economy should growth decelerate significantly.”

In early December, Fitch Ratings raised the outlook for New Zealand banks to stable from negative, citing stabilising household debt and slowing house price growth.


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