Economy Hub: New Govt may slow GDP growth

Prime Minister Jacinda Arden and Deputy Prime Minister Winston Peters sitting down with the Cabinet for their first meeting at the Beehive. 26 October, 2017. New Zealand Herald pic Mark Mitchell

GDP and employment growth are likely to slow as the new Government implements its tighter migration policy over the coming year, says ASB chief economist Nick Tuffley.

Economists would be waiting for more detail on key policies but the big areas of focus would be migration and the implications for housing and the fiscal outlook, Tuffley told The Economy Hub video show.

Other issues of significance were wage growth and what that meant for inflation, and proposed changes to monetary policy and the Reserve Bank Act.

"We're expecting migration to slow of its own accord anyway," Tuffley said.

ASB's projections had net migration down to about 50,000 in 2019, and while he was still working through the new Government's policy it was possible that could drop to about 30,000, he said.

"So that does mean slower population growth, slower overall GDP growth and probably slower employment growth," Tuffley said. "And also slightly lower tax revenues because the revenue base won't be quite so big."

Top line GDP growth might slow down, but that did not necessarily mean slower GDP per capita.

However, that could still put pressure on the Government's accounts, which had been underpinned by migration fueled GDP growth, he said.

The other big area to watch was property.

Fewer people coming into Auckland would make it possible to overcome the housing deficit more quickly, Tuffley said.

"But we're still talking about two to three years before we're actually building enough to meet population growth, even if it starts slowing."

Tax changes that were less favourable for investors would likely result in more caution at that end of the market, he said.

"It does suggest we're going to see a bit of pressure coming on property in the shorter term but the flip side of that is it gives first-home buyers a bit more of an opportunity."

On general confidence Tuffley said there would likely be a period of uncertainty until there was more detail about economic policy.

There was a risk that business people and consumers might sit back and take a wait and see approach.

"That's why we'd expect to see confidence and spending be a little bit softer in the short term," Tuffley said.

"So a key thing from the Government's point of view is [to] give people as much clarity as they can as soon as possible."

Tuffley said moves to raise the minimum wage could add impetus to wage inflation, although there were already expectations that would rise in the coming year.

Despite that he did not expect to see the Reserve Bank needing to lift interest rates for some time, with softer growth in the short term weighing against inflation growth in the longer term.

It was difficult to be sure about monetary policy until details of the new target agreement were announced.

"The devil will be in the detail around how they include an employment focus."

Tuffley was hopeful that measures to target unemployment would be flexible, verbal targets.

"That might just mean that the timing of interest rate moves might be slightly different," he said.

"If you have a numerical target around unemployment that will be more problematic for the Reserve Bank because they could quite clearly be torn two ways."

Overall New Zealand was well placed to cope with some change in economic policy settings.

"I'm pretty relaxed, we're in a reasonable global environment, the terms of trade are near a seven-decade record. So the back-drop is pretty good," he said.

"Yes we're talking about a slight slowing of growth but we're still looking at about three per cent so it's a pretty decent environment."