ANZ economists are seeing a “heightened chance” of an economic growth wobble and have lowered their near-term GDP forecasts. They see continuing softness in the housing market and possible impacts from that through slower consumer spending patterns.
In their weekly Market Focus publication the economists say that while they retain a broadly constructive view of the medium-term growth picture, “we have turned more circumspect near term”.
This has been reflected by the economists cutting their forecasts of growth in the already completed (but the official figures have not yet been released) September quarter from 0.7% to just 0.3%, while they now see growth of 0.5% in the December quarter, down from a previous 0.7% forecast. However, the economists have raised their forecasts for the second and third quarters of next year to 0.9% from 0.8% previously.
The economists stress that the “wobble” they see for growth is not expected to turn into something longer-lasting, “but it certainly marks us out as less upbeat than the likes of the Treasury and RBNZ”.
“Above-trend growth is hard to achieve when the most cyclical part of the economy (housing) looks set to remain soft. That has obvious implications for both the outlook for tax revenue and monetary policy, although the picture is complicated by inflation risks that are shifting higher.”
Last week the Reserve Bank of New Zealand released its latest Monetary Policy Statement containing updated economic forecasts. The RBNZ’s forecasting GDP growth of 0.7% for the September 2017 quarter and a bumper 0.9% for December – both forecasts now much higher than the ANZ is predicting.
The ANZ economists say there appear to be two main areas where their view differs from that of the RBNZ and Treasury:
“1. We see the soft housing market as likely to have more of a negative influence on consumption. Even if the relationship between house prices and consumption growth is not as strong as it once was, we still expect there to be some negative seepage – we are arguably seeing that already in softer spending data. We acknowledge that the outlook for household income growth still looks reasonable. That is important. However, we can envisage a scenario where at a time when the asset side of the balance sheet is looking a little shaky, that households will look to lift precautionary savings (i.e. not spend the full income windfall). Additionally, history has taught us that at the very least, it is difficult for the economy to grow above trend when the most cyclical part of the economy is soft.
“2. We see a higher chance of private sector activity being crowded out by the public sector boost, particularly in the construction sector. Simply adding new public spending to growth forecasts is too simple by half, especially at a time when a number of sectors are already dealing with capacity pressures (and migration restrictions have the potential to accentuate that). Yes the likes of the KiwiBuild program aims to circumvent one constraint that the sector has been grappling with – access to capital – given that it puts the Government’s balance sheet to work. However, the key issues surrounding capacity and labour resourcing remain.”
The ANZ economists say a “number of indicators for Q3 activity” have looked “soggy”.
“The heavy traffic component of our Truckometer contracted 1.4% q/q in Q3 – the weakest quarterly growth since Q3 2012, though weather may have played a part.
“Both milk production and livestock slaughtering fell over the quarter. Compared with Q2, visitor arrivals are down 3% as the impact of key sporting events unwinds. While total paid hours rose 0.8% q/q in Q3, growth was softer for some of the services sectors where we use paid hours as an indicator. And core electronic card spending saw its weakest quarterly growth over a September quarter since 2012 (with October figures pretty mediocre too), providing a serious hint that housing market weakness is spilling over.”
The economists say there are “broader risks” too.
‘Taken a hit’
“Business sentiment has obviously taken a hit and anecdotes on the housing market have remained weak post-election.
“The latter is hardly surprising given some of the more interventionist measures being proposed. We are certainly keeping a close watch on market listings.
“They are low across the country right now, but if they start to increase, perhaps as investors look to exit, then the risk profile for prices would be skewed lower. Net migrant inflows have already started to soften and indicators on construction have been a little ho-hum as the sector struggles with capacity, costs and capital pressures.
“Additionally, we are also picking up that bigger-ticket spending (car sales especially) have been sharply weaker of late, which again hints at housing market spill-overs. Weaker spending growth would certainly not be inconsistent with the signal provided by the likes of our estimate of household discretionary cash flow.”
The economists believe housing market weakness is set to persist, and hence so too the risks of broader spill-overs to the rest of the economy.
“For all that though, we are not forecasting large outright falls in house prices (that would require a lift in forced sales in our view, which we don’t expect).”
Positives for the economy
The economists do point to a number of upcoming positives for the economy, however.
One thing they outline is their expectation that the “biggest headwinds” from the credit cycle are arguably behind us.
“Over the past 12 months or so, banks have restrained credit and competed more aggressively for domestic deposits as they have attempted to close a funding gap.
“Looking at the quarterly change in household lending and deposits as a proxy, that ‘gap’ has closed a great deal. While we are not expecting the credit flood-gates to open by any means (things like the RBNZ’s review of bank capital are still lingering in the background), as a cyclical driver, credit dynamics should turn more neutral.”
In other likelly positives for the economy, they see “alternative growth drivers” emerging domestically.
“Fiscal stimulus is the obvious #1 candidate, and some of the numbers at face value look large. In 2018/19 alone, the new Government is proposing spending an additional $3.5bn (which doesn’t include new capital spending or additional initiatives from the coalition agreements).
“All else equal, things like the proposed families package will arguably have a bigger spending impact given that it will put additional money in the pockets of those with a higher propensity to consume.
“So for now we are happy to retain a broadly positive medium-term expectation, with growth returning to more-or-less trend rates.
“Notwithstanding the near-term risks, we forecast annual growth up towards 3% by the end of 2018, and averaging 2½-3% over the next couple of years.”