New Zealand is facing a home building growth slowdown over the next three years, as increased materials, labour and funding costs delay work.
The New Zealand Institute of Economic Research (NZIER), in releasing the latest Consensus Forecasts, says year-on-year residential investment growth is expected to peak at 13.9% in March, before moderating to 5.4% in 2018, 2.7% in 2019 and to 0.4% in 2020.
“Strong population growth has boosted demand for dwellings, but the acceleration in construction and funding costs have seen some developments put on hold,” the NZIER says.
Residential investment growth forecasts are lower in the near term, but higher from 2018, compared with the last Consensus Forecasts in December.
As for annual household spending growth, the NZIER says the consensus forecast is up from December, to 4.9% in the year to March, 3.5% in 2018, 3.1% in 2019 and 2.8% in 2020.
“Net migration continues to edge up to record highs, and is boosting household demand. Continued strong population growth and high consumer confidence should underpin robust household spending growth through to 2020,” it says.
Looking at economic growth more broadly, the NZIER says forecasters expect annual gross domestic product (GDP) growth to tail from 3.4% in March, to 3.3% in 2018, 3.1% in 2019 and 2.5% in 2020.
Forecasts have been revised up from December, but NZIER says the range of them recognises “the longer term outlook remains uncertain, with forecasts ranging from 1.6% to 3.3% for the year to March 2020”.
The NZIER says forecasters see consumer price index (CPI) growth increasing from 1.7% in the years to March 2017 and 2018 to 2.0% in 2019 and 2020.
“Beyond March 2017, inflation forecasts are broadly unchanged, with continued expectations annual inflation will reach the Reserve Bank’s 2 percent mid -point target by March 2019,” it says.
“Forecasters continue to expect interest rates to trough in 2017. The Reserve Bank kept the OCR on hold at 1.75% at its February Monetary Policy Statement, and indicated it did not expect to move interest rates for some time. Forecasters expect three OCR increases by March 2020.”
The NZIER says it is expected that the “global shift in sentiment towards protectionism” will affect New Zealand, with export growth set to drop from 2.8% in the year to March, to 1.2% in 2018, before picking back up.
However, it notes the export outlook is “highly uncertain”.
“Forecasters have revised up expectations for the NZD over the whole projection period. The more favourable New Zealand economic outlook relative to most major economies is expected to support the NZD to 2020,” the NZIER says.
“However, as the Federal Reserve lifts interest rates over 2017, New Zealand’s reduced yield advantage will see a mild depreciation in the NZD, albeit still at a high level.”
The NZIER says forecasters have revised up their expectations for the employment rate.
“Employment growth forecasts have been revised higher, as business optimism supports hiring intentions. The unemployment rate is expected to fall gradually to around 4.8% by 2020.
“The fall in the unemployment rate is now expected to be slightly shallower as the expansion of the labour force from strong net migration has helped ease labour shortages.”
Wage growth is currently subdued, but forecasters expect a strong lift from 2018.