NZ's slowdown nears bottom of the trough

New Zealand's economy is slowing but will soon hit bottom. Photo / 123RF

New Zealand's economic slowdown looks set to bottom out mid-year with 2019 GDP growth dipping to just 2.2 per cent, according two new reports.

Both ANZ Research and Capital Economics are picking that economic growth will pick up later this year after a subdued first half.

In its latest quarterly Economic Outlook ANZ has downgraded it's near term forecast and brought forward its expectations for Reserve Bank rate cut (25 basis points in August).

It picks average annual GDP growth softening to just two per cent by mid-year.

However Reserve Bank stimulus will boost the economy from that point for average growth of 2.2 per cent across 2019, picking back up to 2.5 per cent in 2020 and three per cent by the end of 2021.

Capital Economics takes a more upbeat view short term but is less positive about the rebound – it also sees annual GDP growth at 2.2 per cent for 2019.

Economist Ben Udy sees positive signs in areas like electronic card spending and car registrations pointing to the end of the slow down he is less optimistic about the longer term strength of the rebound.

Udy sees low business confidence as a continued drag on the local economy, particularly in tandem with slow global growth.

"We think business investment may remain subdued for some time," he says.
While some of the recent data had been encouraging a steady improvement over several months was needed "before concluding that the economy was poised for a rebound", he said.

ANZ highlights the cooling housing market as one of the headwinds facing the economy.

"History tells us that it's difficult for the New Zealand economy to grow above trend when the most cyclical component (housing) isn't shooting for the moon," the report says.

"So while modest house price inflation is probably a good thing from a financial stability standpoint, it does imply a lower-than-otherwise pass-through to real activity and accordingly inflation pressures."

However such a long period of extended house price gains "households are generally in good stead," ANZ notes.

Gradually rising wages, low interest rates, government support packages and continued strong immigration have continued to support private consumption growth.

ANZ also highlights the risk from slowing global growth.

"Weaker growth has been broad based across New Zealand's trading partners. Several key uncertainties appear to have weighed on activity: China-US trade negotiations, Brexit and the effects of previous tightening in Chinese credit growth."

Australia had also seen a weak housing market and US growth prospects had eased.

Despite that, the bright spot for New Zealand was that commodity prices had held up well.

"But the risks are looking a bit one sided with global demand fragile."

ANZ Research now picks three official cash rate cuts from the Reserve Bank - one in August, followed by November and again in February 2020.

"Overall, we see risks to GDP as broadly balanced, while risks to medium-term inflation are skewed south. " ANZ says. "OCR cuts are needed - it's just a question of when they will eventuate and what impact they will have."