Westpac’s chief economist not convinced the economy is in as good shape as the RBNZ suggests, as Acting Governor Spencer says the RBNZ’s projections are 'perfectly balanced'

The Reserve Bank’s forecast for economic growth has been branded “excessively optimistic” by a top economist but the central bank maintains its Gross Domestic Product (GDP) projections are “perfectly balanced.”

Westpac chief economist Dominick Stephens says economic growth will fall short of the Reserve Bank’s expectations which will have “implications for their views on monetary policy.”

In its Monetary Policy Statement (MPS) released on Thursday, the bank said it expects annual GDP growth to accelerate to 3.4% this year and to 3.5% in 2019.

“[GDP growth] is expected to strengthen, driven by accommodative monetary policy, a high terms of trade, Government spending and population growth. Labour market conditions continue to tighten,” the statement says.

The Reserve Bank has revised down its economic growth expectations from its November MPS – growth expectations Stephens at the time called “extremely optimistic.”

 “They have addressed that and toned down how the Government’s [policies] are going to affect the economy – but the fact remains that their growth forecasts are higher than ours.”

Speaking to media after the MPS was released, Acting Governor Grant Spencer said the Reserve Bank has had more time to consider the impact of the policies, which show a reduced fiscal impact in the short term.

“In November, we had talked about a half percent impact on GDP from increased Government spending. That’s now pulled back overall to about 0.4%,” Spencer said.

Despite this, Stephens says the central bank’s forecasts are still “excessively optimistic.”

He says the recent plunge in business confidence portends a slowdown in business investment that the Reserve Bank has not allowed for and he doubts construction activity will be as high as the central bank is picking.

“Furthermore, we expect the Government’s upcoming changes to the tax treatment of investment housing, the foreign buyer ban, gradually rising fixed mortgage rates and lower net migration will slow the housing market later this year,” he says, adding that a slow housing market would lead to slower consumer spending.

“Westpac is not expecting any movement in the official cash rate until 2019.”

But Spencer does not think the Reserve Bank’s forecasts are not excessively optimistic or excessively pessimistic – “we think we are perfectly balanced,” he told media.

“We have been forecasting and seeing strong growth in the economy – notwithstanding the weakness in the second half of 2017, it’s been a pretty strong performance and we expect that to continue.”

Reserve Bank Assistant Governor and Head of Economics John McDermott pointed out the recent upward revision in GDP figures – when growth was revised up close to 2% over the last two years – was a sign the economy had a lot more activity than what was once thought.

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