NZIER: Economic risks rising but growth still solid

Domestically, businesses are feeling more downbeat about the economy. Photo / Getty Images

A combination of slowing population growth, falling business confidence and international trade tension has prompted the New Zealand Institute of Economic Research (NZIER) to revise down its outlook for growth.

"Businesses are feeling increasingly pessimistic about the economy, with deteriorating profitability a concern for many", said Principal Economist Christina Leung.

However she emphasised the shift in forecasts for latest NZIER Quarterly Predictions were subtle with the longer term outlook remaining solid.

"Although growth is expected to moderate on the back of a continued slowing in population growth, we forecast annual GDP growth to average just under 3 per cent over the next five years – still a respectable outcome," she said.

The revision was mainly due to the rise in downside risks, she said.

"But whether these risks translate to a slow down in real activity remains to be seen."

Domestically, businesses are feeling more downbeat about the economy, she said.

Costs were rising, and with businesses finding it difficult to pass these on to customers in the form of higher prices this was impacting negatively on profitability, Leung said.

The recent announcement by Fonterra of a downward revision to its payout and dividend would dampen confidence in the rural sector.

There was also a political issue with domestic policy uncertainty.

"It's policy relating to labour laws, whether that will continue to increase labour costs for businesses and its policy such as what they'll do on spending in terms of infrastructure," she said.

Although residential and non-residential construction demand remained strong, capacity constraints were limiting the extent to which construction activity could ramp up.

Extremely tight margins in the construction sector had seen major construction firms exit the industry, raising questions about who would lead the construction of large-scale developments, Leung said.

"We expect a more protracted construction cycle as a result."

In line with other economists and the Reserve Bank's own outlook the NZIER now sees the official cash rate on hold until early 2020.

Globally, the normalisation of monetary policy led by the US meant rates were on the rise and that needed to be factored in - especially for emerging markets.