Liam Dann: The top five things that will shape the New Zealand economy in 2020

Sharon Zollner, chief economist at ANZ Bank. Photo / Dean Purcell

What are the big trends that will define our economy in 2020?

We asked some of New Zealand's leading market economists to give us their picks. From those we've distilled the top five and some honourable mentions.

When we did this last year the economists were picking: commodities, house prices, interest rate yield curves, Chinese growth and wage inflation as indicators to watch.

The top two - commodities and housing - really were New Zealand's economic saviours in 2019.

It's almost a bit depressing, but for all our efforts to diversify the economy sentiment has rebounded on the back of strong export prices and a resurgent Auckland housing market.

We've also seen some pretty solid wage growth this year - albeit underpinned by Government policy and state sector wage settlements.

Chinese growth held up despite the trade war thanks largely to renewed government stimulus. At the very least it stayed firm enough to maintain demand for New Zealand exports - even though tourist numbers took a hit.

And last year's big story, the inverted yield curve as a harbinger of recessionary doom, didn't quite pan-out.

In fact, the chart which measures the returns on US Treasury Notes over time did briefly dip into inverted territory - with returns for short-term (2-year) Treasury Notes going higher than returns for long term (10-year) notes.

But they didn't stay there for long as US economic confidence bounced back through the second half of the year.

So what to watch in 2020?

Credit conditions

The most common theme in the economists' picks for 2020 was the risk of credit tightening.

It was a horror year for the Australasian banks in 2019 with numerous controversies and the sudden departure of management on both sides of the Tasman.

A combination of fallout from culture and conduct reviews, increased capital requirements, low interest rates squeezing margins and a general slowing of economic activity has already prompted banks to lend more cautiously.

That's having a flow-on effect through the business and agriculture sector in particular.

The housing market remains key to New Zealand's economic outlook. Photo / NZME

Will the RBNZ's new capital rules put even more pressure on lending?

"The RBNZ says its capital requirements won't affect the economy much, while the more extreme commentaries out there are predicting a credit crunch [my view is somewhere in between]," says Westpac chief economist Dominick Stephens.

"Annual business credit growth has been pretty stable at around 5 per cent over the past four years. If it tanks, the doomsayers were right – and the economy will slow. If it stays steady, then the RBNZ's more sanguine view was right."

"We think there's more of a potential story here than the RBNZ does," says ANZ chief economist Sharon Zollner. "Observed credit growth is of course a mix of demand and supply factors but we will be watching it more closely than normal over the next 12 months."

House prices

The late lift in Auckland sales seems to have revived sentiment across the country. Such is the power of the property wealth effect in New Zealand that a turn in the market has already flowed through to consumer confidence, with the latest McDermott Miller survey showing a sharp rebound in November.

"Does the modest upturn under way turn into a full blown boom, with attendant impacts on credit, consumer spending, interest rates etc," asks ASB chief economist Nick Tuffley.

"Supply issues still seem to be at play in Auckland and some other parts of the country, but there must be increasing concerns that further significant house price rises only set the housing market up for a bigger potential correction at some point in the future," says Infometrics chief forecaster Gareth Kiernan.

"In the meantime, strength in house prices could have positive effects for consumer spending as well."

Business confidence (and investment)

Business confidence remains a controversial indicator with some arguing it's biased and self-fulfilling. Of course, even if both these complaints are valid business sentiment still represents a powerful force on the economy influencing both employment and investment trends.

On that basis it remains a popular pick among economists as something to watch in 2020.

ANZ's Zollner picks the investment aspect of the ANZ Business Outlook survey as key.

"Most seem to agree the economy is bottoming out around 2 per cent, but there's a range of opinions on how fast it will rebound from there," she says.

"That'll hinge to a large extent on whether businesses seize the 'opportunity' low interest rates present or not."

She notes that from this month ANZ will have new data in the Business Outlook survey asking firms what the three biggest current drivers of their investment decisions are.

That, as well as the headline investment intentions data, will be revealing, she says.

Politics (elections and government spending)

The announcement Government plans for more spending on infrastructure and the prospect of more to come as we head into election year has prompted several economists to pick fiscal stimulus as a key feature of the economy in 2020.

"It's election year and the Government has already signalled some intent with its infrastructure announcement," says Infometrics' Kiernan.

"We doubt the infrastructure channel will be sufficiently timely to boost economic growth and/or the Government's polling before the election, even if the economic rationale for more infrastructure investment is sound.

"Look for more cash to be splashed around next year – particularly from NZ First given what remains in the provincial growth fund and how closely they're flirting with the 5 per cent threshold."

The Budget will be the centrepiece of new spending, says BNZ head of research Stephen Toplis.

"We know, roughly, what the Government's capex plans are - what we don't yet know is what the opex/tax plans will be.

"The election outcome in both the United States and New Zealand will be of major importance in determining economic direction."

"Given the capacity constraints that still remain in the construction sector, it will be interesting to see what the mix of public and private investment will be over the coming years to see if there are any signs of crowding out of private investment," says NZIER principal economist, Christina Leung.

NZ Initiative's Oliver Hartwich offers a global take on the issue, pointing to Global Policy Uncertainty Index which is riding higher than it was before the GFC.

Inflation

Inflation, and wage inflation in particular, remains central to many economic outlooks. It still plays a key role in determining monetary policy settings, after all.

"Confidence may improve, markets may rally higher, and growth may become more self-fulfilling. But, if inflation remains structurally challenged, and wages fails to lift, then measures of inequality will worsen," says Kiwibank chief economist Jarrod Kerr.

Christina Leung, NZIER economist. Photo / Supplied

"New Zealand's productivity has languished, and our burgeoning infrastructure deficit doesn't help. Wages growth has been soft, and inequitable. Public sector wages have lifted recently, as several collective pay deals for frontline public servants came through. What we want to see is more broad-based wage growth."

"Low inflation was key to the RBNZ's ability to leap in and rescue the economy from low business confidence and global woes this year," says Westpac's Stephens.

"Inflation below target meant the RBNZ could aggressively cut the OCR, which facilitated that housing market turnaround. I expect that ongoing low inflation will allow the RBNZ to keep the party going. However, non-tradables inflation has been trending higher recently, and if it continues to lift then the RBNZ may have to confiscate the punchbowl."

"It's not so much wages specifically that we are interested in but, rather, what wage growth will tell us about, labour shortages, the economy's potential growth rate, pressure on corporate profitability and the likelihood of heightened CPI inflation," says BNZ's Toplis.

Honourable mentions:

The NZ Initiative's Hartwich went for a more structural pick, in productivity growth, which most economists agree is a missing ingredient in New Zealand's economic story.

Hartwich points to the OECD graph for productivity as expressed by "GDP per hour worked". New Zealand's growth path is not flash.

"Not good enough for a country that likes to think of itself as broadly successful," he says.

"We need to do a lot better to be able to afford the education, health care and general quality of life we aspire to. Wellbeing is just a hollow intention without productivity."

Hartwich also highlights the rise of negative yielding debt around the world as a symptom of the worrying imbalances that remain in the global economy.

Economists will also still be keeping an eye on global growth in 2020 particularly commodity prices, news out of China and production indicators like the PMI and Global IP (industrial production) .

Kiwibank's Kerr says: "We're an island on the edge of the earth, with a huge reliance on global trade and finance. In a world grappling with trade wars and threats of Brexit, indicators of global production are important. Global growth forecasts have been ratcheted down all year. Recent indicators suggest a solid improvement into 2020. Global IP data will give us a good guide on the sustainability of the recent improvement."