A surge in March quarter GDP is further evidence of a resilient New Zealand economy. But with economic activity comfortably above pre-COVID levels, employment rising, and inflation also set to pop higher, it’s becoming harder to justify keeping interest rates at record lows.
The Reserve Bank’s independence is an important feature of New Zealand’s economic framework. The government has some scope to include housing in the Bank’s policy objectives, and it must also ensure that the Bank takes an appropriately broad view of the economic effects of its policy decisions. But housing’s underlying problems will only be solved by more fundamental reforms of our tax system and settings around the supply of land.
The global economic slowdown will continue to be a drag on New Zealand’s economy over the next year, according to Infometrics’ latest forecasts. Escalating tariffs as a result of the trade war between the US and China have seen global growth expectations steadily downgraded. China, New Zealand’s largest export market and the major engine of the global economy over the last decade, is growing at its slowest rate in 30 years. All these factors mean that next year the world economy could record its slowest growth since 2012.
The July 2019 Infometrics forecasts show a long, slow, slowdown is on the cards for the New Zealand economy. With lower growth on the way, it’s worth highlighting some of the options that are available to New Zealand to combat the slowdown along with the opportunities and challenges of these options.
Households could go into their shells over the next year as economic conditions worsen, with little to support spending growth in the near-term, according to Infometrics’ latest economic forecasts. The stagnating labour market and the potential for house prices to fall both threaten to drag consumer confidence further below its long-term average.
Since the Reserve Bank surprised markets with its shift towards an easing bias, the outlook for interest rates has been a constant source of speculation. But the timing of the shift in stance was curious – in our view, nothing fundamental had changed, and the Reserve Bank is sending out the entire fire brigade to rescue a kitten from a tree.
The August Monetary Policy Statement was the most influential yet under new Governor Adrian Orr, even though there was no change to the official cash rate (OCR). Mr Orr pushed out expectations for a rates hike until 2020, sending the New Zealand dollar sharply lower.
But it was the Governor’s assertion that rates could and would move lower, if weak indicators persist, that is both his biggest warning and most questionable stance.
Labour market statistics for the June quarter will be released by Statistics NZ next week and are expected to show the job market continuing its good performance. But in spite of low unemployment and capacity pressures spreading more broadly across the labour market, rather than being concentrated in a few select industries (eg construction), there is little sign yet that wage growth has begun to pick up steam. Nevertheless, with inflation back up inside the Reserve Bank’s target band of 1-3%pa during the last three quarters and population growth likely to start tapering off, we expect to see a pick-up in wage growth over the next year.
It has been a bit of an unusual time recently in the banking sector following the Reserve Bank’s cut of the official cash rate by 25 basis points to 2.0%. Instead of playing ball and passing on this cut to mortgage holders and other borrowers, the major retail banks, with the notable exception of Kiwibank, passed on mere crumbs and, intriguingly, lifted the interest rates they offer to term depositors.
The Reserve Bank’s recent announcement of new loan-to-value restrictions that it plans to implement from the start of September caught us a little by surprise – not the idea itself, because that was pretty well telegraphed, but the magnitude of the latest changes. We’ve spent some time analysing the mortgage lending data and believe that these changes could have the biggest effect on housing market activity of any of the Bank’s moves since 2013. This article presents our analysis of the potential effects of the upcoming LVR changes in September, as well as providing our estimates of the effects of the previous two sets of LVR restrictions in 2013 and 2015.