Economy Hub: At the crossroads - why the outlook is still so uncertain

COMMENT:

Employment is strong, GDP growth is strong - so why is New Zealand's economic outlook still so murky?

Tomorrow the Reserve Bank gives us new forecasts but it is almost certain to hedge its bets on the future direction of interest rates.

Official cash rates have been on hold at 1.75 per cent for two years and could potentially stay on hold for up to two more.

So why is New Zealand's outlook so hard to pick and what are the big countervailing forces that the Reserve Bank has to tally up?

ASB chief economist Nick Tuffley says its important firstly to remember that, while the economy is at a bit of a crossroads, we are starting from a strong position.

GDP had surprised on the upside - at 1 per cent for the second quarter - and today's employment figures were also unexpectedly strong.

"But when you're looking ahead for that path going forward, it is very murky," he said.

The weakness of business confidence is one of the big domestic issues that still can't be ignored, he says.

"The other thing is what's happening globally - trade wars and tensions, high oil prices and signs of those things having some impact on global growth."

So while New Zealand's export performance in the past year had been very strong there was risks to that if global growth slowed sharply.

Whole milk powder prices, for example have, fallen for the past few months and are now at their lowest point since August 216.

Meanwhile inflation pressure remains a big driver of Reserve Bank thinking, Tuffley said.

The rise of petrol prices this year has pushed inflation up sharply but that is a short-term phenomenon. The Reserve Bank will be look through that to core-inflation which remains on the low side.

"That's still below two per cent - though its gradually creeping up," Tuffley said.

"So the Reserve Bank will be very comfortable that [inflation] is not running ahead of itself but it will they'll see that there job isn't quite done yet in terms of getting it back to more normal levels."

"One of the key things we see contributing to inflation is stronger wage growth coming through. So that story is going to be important."

While today's employment data was strong it showed that wage growth is still relatively subdued.

Despite the strength of the topline GDP and employment data it still wasn't possible to ignore the extremely low level business confidence this year, Tuffley said.

"We rarely see business confidence surveys this week without seeing growth slow," he said.

"But that translation of business confidence into activity, whether that happens or not, is a really key judgement we are all needing to make about the outlook at the moment."

Tuffley says he remains upbeat about the outlook - predicting GDP growth to bottom out around 2.5 per cent and then head back up towards three per cent.

But without inflation pressure "there is no hurry to put up rates and we think the Governor can sit back for quite some time and figure out whether he needs to give the economy more of a nudge or not."