Infometrics Economic Forecast – March 2016

Flagging growth, or unfurling a recovery?

Our March 2016 forecasts have recently been made available to clients.  

Since our November publication, rising confidence levels and dodging a serious drought have placed the New Zealand economy in a better-than-expected state.  We forecast that GDP growth will recover from 2.4%pa in March 2016 to peak at 2.9%pa in the middle of next year.  However, a downturn in building activity will drag down to 1.8%pa by mid-2018, and possibly lower beyond our two-year forecast horizon.  

More details are available in our Executive Summary.
Gareth Kiernan
Chief Forecaster

Excerpt from the Forecast executive summary . . .

Fears that we’d have to lower flags to half-mast to mourn the demise of the domestic economy during 2016 now seem to be ill-founded.  Confidence levels have improved over the last six months, and indicators of the labour market and household spending have been fluttering in the wind.  Tourists and immigrants have been flocking to our shores and boosting activity – once they’ve realised that our four-star offering is superior to Australia’s six-star version.

The other big plus over the last couple of months has been some good summer rainfall, ensuring that a drought has not left our agricultural sector hanging limply.

Alongside these positives, we are set for an eggsplosion1 of new construction activity during 2016.  Auckland will be the centre of this pick-up, with strong population growth and the buoyant services sector demanding more housing and commercial space respectively.  The government’s contribution to construction should not be overlooked either.  Not content with a $26m referendum, Bill English has pledged allegiance to an extra $1bn for more infrastructure spending, and there are plenty of government-funded rebuilding projects in Christchurch that have yet to catch the breeze.

It’s not all rainbow-farting kiwis2 though.  Dairy returns remain weak, and we have further delayed the speed with which we think milk prices will recover – holding below $6/kgms until 2019/20.  Uncertainty about the robustness of the Chinese economy has also led us to revise down our forecasts of GDP growth across Asia.  If it occurred, a significant credit crunch in China would bring about as much joy to exporters as a glimpse of the Jolly Roger on the horizon.

The lack of inflation, both globally and domestically, has left the Reserve Bank’s monetary settings from early 2015 looking like a deranged cat raking its garden3.  We expect the official cash rate to be lowered to 2.25% this year, before being hoisted back up to 2.75% during 2017.  This standard of low inflation and low interest rates is vastly different to financial market conditions a decade ago, when the OCR was (union) jacked up to 8.25%.

Prospects for the domestic economy over the next 12-18 months look relatively good, but a downturn in construction activity from late 2017 onwards could be the Hone Heke that brings our flagpole crashing down to earth.  Unless a kiwi with the power to shoot a laser out of its eye4 appears, the highly elevated levels of building activity in Canterbury and, more recently, Auckland cannot continue forever.  As a result, we forecast that GDP growth will slow from a (red) peak of 2.9%pa in September 2017 to 1.8%pa by mid-2018.

Forecasts Mar2016

 

 

 

 

 

 

 

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Infometrics economists help decision makers and analysts understand the economic environment facing their organisation, sector, or region. We don’t pretend to know the future, but we can help to shed light on the balance of economic opportunities and risks in the New Zealand economy and beyond.  A clear understanding of your external environment can help you make better business decisions. With over 30 years experience in forecasting the outlook for the general economy, building and property, and transport sectors, Infometrics has expanded over recent years to include detailed industry and regional economic and labour market forecasts.  We also publish periodic reports, such as our annual Infrastructure Survey, which contains a wealth of detailed information on the outlook for infrastructure work nationally and in our regions. Our NZ economic forecasting reports are presented in straightforward language that is easy to understand.  Our economists are also on hand to guide you through the issues relevant to your industry and can provide you with tailored advice should you require more detailed analysis.

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