Liam Dann: Is Winston's predicted downturn on its way?

The prediction by Winston Peters of an economic correction or slow down, made at the time of October's coalition announcement, appears to be coming true, says Infometrics. Picture / Mark Mitchell.

Economic forecaster Infometrics has slashed its outlook for the New Zealand economy, citing Government policies that are creating short-term head winds.

"The prediction by Winston Peters of an economic correction or slow down, made at the time of last October's coalition announcement, appears to be coming true," Infometrics says in its latest quarterly release.

Infometrics now sees GDP growth slowing to 2.4 per cent by the end of the year and slipping below 2 per cent in 2019 - almost a per cent lower than earlier forecasts.

That's also a gloomier outlook than other economists - Westpac sees growth holding at about 2.7 per cent in 2019 and ASB has a rosier 3.2 per cent in its forecasts.

"What we are seeing is the economy going through a transition phase, " said Infometrics chief forecaster Gareth Kiernan.

"Part of that relates to a slowdown in migration and the housing market, which were already in train before the Government came in. But we've also seen changes in government policies and priorities."

One of the key areas was infrastructure, he said.

"The dumping of major roading projects in favour of rail and public transport initiatives will create a near-term hole in government investment."

Changes in infrastructure priorities represented a 2.9 per cent contraction in government investment spending between now and September 2019, Kiernan estimated.

Kiernan also saw ongoing capacity constraints in the construction sector delaying the stimulus effect of the Government's KiwiBuild programme.

The other big headwind for the economy was likely to be a slowdown in migration in 2019 and 2020.

Infometrics forecasts the annual net migration gain will fall from 68,900 (for the year to March) to below 17,000 by early 2021.

The prediction by Winston Peters of an economic correction or slow down, made at the time of October's coalition announcement, appears to be coming true, says Infometrics. Picture / Mark Mitchell.

While the Government had yet to make a big call on immigration policy, from 2019 the changes already brought in by National and changes to foreign student numbers the Government was looking to introduce would start to hit hard, he said.

"You've also got the economic cycle where, if you are getting slower growth in New Zealand relative to the rest of the world, and particularly to Australia, that's going to encourage more New Zealanders to head across the Tasman and your going to see fewer New Zealanders coming home from overseas."

The slower growth would make trading conditions more difficult for businesses.

"We have seen business confidence coming off in the wake of the election," he said. "I think some of those concerns are well founded."

The Infometrics report highlighted risks posed by rising international interest rates.

Kiernan said the slower growth path did not necessarily mean the Government was doing the wrong thing in areas like transport, housing and migration, and that they could eventually result in more sustainable long-term growth.

"It is becoming clearer that the transition phase could result in a less buoyant performance by the economy over the next couple of years," he said.

If growth comes off faster than migration then we would likely see per capita GDP growth falling into negative territory, he said.

Further out though Infometrics predicted that GDP growth would average 2.1 per cent between mid-2020 and mid-2023 - a stronger performance than it had previously forecast.

"There will be some catch-up in government spending as infrastructure projects get under way, while more expansionary fiscal policy is also likely to be reflected in faster growth in government consumption," he said. "So there's potential for faster growth when you look through 2021 and 2022."