The New Zealand Institute of Economic Research (NZIER) says the economy will remain subdued throughout the remainder of the year, but hasn’t gone so far as to say the “tide’s turned on our economy“.
In its Quarterly Predictions released today, NZIER says it expects Gross Domestic Product (GDP) growth to dip close to 2% by the end of the year, before rebounding over 2016. Annual GDP growth is currently at 3%.
It also expects inflation to remain below the Reserve Bank’s (RBNZ) 2% target mid-point by 2018, and believes Governor Graeme Wheeler will make two further cuts to the Official Cash Rate (OCR) by the end of the year.
The OCR is currently at 3.0%, and was cut by 25 basis points in the past two OCR reviews.
The NZIER’s forecast is slightly perkier than Westpac economists’, who early this month said the tide had turned on the New Zealand economy, and we were headed down the same path the Aussies have been on since the end of the mining boom.
In its quarterly Economic Overview, Westpac said it expected annual GDP growth to fall below 2%, unemployment to rise to 6.5%, and the OCR to fall to 2%.
ASB predicted GDP growth to fall to 2.5% by the end of the year, but rebound to 2.9% next year. It also expected the OCR to be cut to 2.5%.
With ASB’s chief economist Nick Tuffley having come out earlier this week saying economists forecasting major doom and gloom are attention seeking, the NZIER seems to have taken a position somewhere in the middle.
Dairy passes on baton to other key exports
The NZIER recognises the global dairy price downturn is what’s softening the pace of the New Zealand economy.
“Business and consumer confidence has deteriorated, with the effects most apparent in dairy-intensive regions”, it says.
“The effects of reduced farm income will reverberate through the economy as farmers rein in spending to ride out the poor seasons.”
While the surprise devaluation in the yuan by the Chinese government has raised fears about the true growth outlook for China’s economy, it says the continued rise of middle class will keep propping up demand for our exports.
The NZIER recognises the lower New Zealand dollar is also helping other sectors grab the baton and run with it.
It believes GDP growth will rebound over next year, as the boost from the lower dollar filters through a range of export sectors.
“Tourism is a standout, as more people are coming to visit New Zealand, staying longer and spending more. Meanwhile, demand for other commodities including beef, wool and kiwifruit is strengthening.”
It says strong migration is also boosting the economy, while “construction remains solid, supported by strong house-building demand in Auckland and a pick-up in demand for new office space and industrial buildings.
“We expect this will remain a key support of economic activity through the next five years.”
While the NZIER recognises low interest rates are only adding fuel to the hot Auckland housing markets, it maintains the RBNZ will remain focussed on its inflation target, and cut the OCR further.
“Inflation in the New Zealand economy remains very soft, reflecting low global inflation and the earlier effects of the high New Zealand dollar.
“The recent drop in the currency will boost imported inflation early next year, but overall inflation should still remain below the RBNZ’s 2% target mid-point until 2018.”