12 October 2019

ANZ state of the nation: themes of slowing growth and caution

ANZ Economist, Michael Callaghan, said the first half of 2019 was turbulent both at home and overseas. And while the New Zealand economy retained some positive aspects, a fragile global outlook curbed trade and investment growth. 

But while GDP growth slowed from its recent peak of around 4.0 percent year-on-year in mid-2016 to just 2.5 percent in Q1 2019, Michael says the economy isn’t about to “fall off a cliff” anytime soon.

“Several tailwinds are supportive of moderate growth going forward, including solid commodity prices, some near-term fiscal support, and recent easing in interest rates and the New Zealand dollar.

“That said, we don’t see any signs that activity is going to lift sharply soon either. Subdued business activity, a soft housing market, and global growth uncertainty are posing headwinds. Absent any adverse global shocks, we expect growth of around 2-2.5 percent year-on-year over the next year.”

According to ANZ’s State of the Nation economic report, domestically, households remain in good stead, supported by low unemployment, gradually rising wages, low interest rates, and for some, higher government transfer payments through the Families Package.

This is despite activity in the housing market remaining subdued, with soft house sales and house price growth. Residential investment activity remains elevated, but ANZ sees downside risks looming in the sector given very weak residential construction intentions, deteriorating profit margins, labour shortages, and land constraints.

Exports holding up well

One bright spot for the New Zealand economy is that prices for exports have held up remarkably well, despite slowing global growth.

But for dairy in particular, part of the explanation lies with softening global supply.

Recent New Zealand dollar depreciation is expected to support export earnings, but with the global outlook fragile, Michael suspects the pass-through to the rest of the economy will be more muted than otherwise. Deleveraging seems more likely than a spend-up.

“One aspect providing a bit of a boost to the economy is fiscal policy, with the Government’s Wellbeing Budget in May adding a bit more spending than was expected,” continues Michael.

“That said, while government spending is expected to support growth in the near term, the impulse isn’t expected to be large or overly persistent. The Government appears adamant on sticking to its fiscal strategy and reducing net core Crown debt to 20 percent of GDP within five years of taking office.

“So long as this is the case, the ability for the Government to boost growth will remain contained. Beyond 2022, there is more scope for flexibility.”

Rate cuts

The Reserve Bank of New Zealand (RBNZ) has also been in the spotlight, delivering proactive rate cuts in the face of the softening domestic and global outlook.

Slowing growth and waning capacity pressures, and the soft signal for future inflation that this represents, were enough for the RBNZ to cut the OCR 25bps to 1.50 percent in May, and a further 50bp to one percent in August.

“We’ve long held the view that the RBNZ will need to cut the OCR, and we think an even lower OCR is likely,” says Michael.

“The RBNZ’s rate cuts have kept downward pressure on the New Zealand dollar and contributed to sizable falls in fixed mortgage rates, but we think more will be needed to see inflation lift sustainably towards two percent.”

ANZ believes the RBNZ’s expectation of a vigorous bounce-back in growth in the second half of the year looks set to disappoint. Additional monetary stimulus should give the economy the boost it needs to support a gradual acceleration in growth over the next few years.

Globally, the growth outlook remains fragile and recent data show renewed softening following tentative signs of stabilisation. Renewed escalation in US-China trade tensions are unsettling markets and pose further downside risks to global trade and investment activity.

“Softening growth globally has seen global central banks turn more cautious and signal easier policy stances. This has supported prices of risky assets, and easier global financial conditions should support activity and reduce the risk of a sharper deterioration in growth.

“But should the lengthy list of global growth risks materialise and manifest in sharply lower commodity prices, we expect the Reserve Bank of New Zealand will cut the OCR promptly.”

This article appeared in the October 2019 edition of Sure magazine.