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Outlook for NZ economy softens but wages projected to rise more, NZIER Consensus shows

Monday 18th June 2018

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Economists have shaved a few basis points off their forecasts for New Zealand economic growth in the next two years even while forecasting stronger wage pressures, according to the NZIER Consensus Forecasts.

The June survey, which averages forecasts compiled from a survey of financial and economic agencies, shows that compared to the March survey projected gross domestic product has been cut by 2 basis points to 2.9 percent for the year ending March 31, 2019, and by 1 point to 3.2 percent in the March 2020 year. Exports are forecast to grow at a slower 1.6 percent pace in the current year before rebounding more strongly than was seen in the March survey.

"Weaker forecasts for exports drive much of this downward revision in the near term. From 2019, expectations of weaker growth in investment explain the softer growth outlook," NZIER said in its report. 

NZIER said in its report that employment was constrained in how much it could grow, which would limit any declines in the jobless rate, which would have the result of stoking wages. The survey shows private sector average hourly earnings may rise 3.6 percent this year and 3.2 percent in the March 2020 year, up from an unchanged 3 percent in the March quarter survey.

But a pickup in wage inflation doesn't feed into generalised inflation, which is seen at an annualised rate just below 2 percent in the next two years. As a result, there's less need for the Reserve Bank to raise interest rates any time soon. The latest survey has the 90-day bank bill rate averaging 2.5 percent in the March 2020 year, just 1 basis point down from the March survey. For 2021, the rate is down 1 point to 3.1 percent.

The residential construction market is seen as an area of uncertainty, despite the government's plan to build 100,000 affordable homes in the next decade. Fixed investment in residential assets is seen growing 2.9 percent this year, stronger than in the March survey, before slowing in each of the following two years. Yet forecasts for household spending were revised up.

"Spending has been very strong in recent years, reflecting support from population growth and improving consumer confidence," NZIER said. "Slowing population growth is expected to weigh on household spending."

For exporters, the outlook has improved, once 2019 is out of the way. Exports are expected to grow just 1.6 percent this year, down from the 2.4 percent pace predicted in the March survey. before rebounding in 2020 and 2021. The trade-weighted index may average 72.6 in the March 2019 year, falling back to 72 by 2021. The TWI was recently at 73.34.

"Although the NZD has surprised on the upside, expectations remain for a depreciation through to 2021," NZIER said. "The US Federal Reserve is expected to continue lifting interest rates over the coming year. In contrast, the RBNZ is expected to keep the OCR on hold until at least the middle of next year. This should reduce the yield attractiveness of the NZD, and hence weigh on the currency."

While New Zealand's export growth had been revised down in the March 2019 year, it would find its stride again after 2019, it said.

 "Although global demand is recovering, the recent outbreak of Mycoplasma bovis will weaken agriculture production over the coming year," It said. "The pre-emptive culling of affected herds is expected to reduce dairy production. Beyond 2019, export growth is expected to rebound." 


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