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Edition 6 - Economic Insights

Beneath the long white cloud

New Zealand’s leadership, lifestyle and natural beauty dominates headlines more often than its economic outlook. Here, we take a look at what’s happening on the ground, and what the numbers tells us about the period ahead.

It’s often called the world’s favourite country. With its snow-capped mountains, fabulous wines and friendly locals, New Zealand regularly tops international polls of must-visit destinations1.

The love affair goes beyond its natural assets. NZ Prime Minister Jacinda Ardern – the surprise winner of a tight 2017 election – has won hearts around the globe for her inclusive style and compassionate leadership in the wake of 2019’s Christchurch mosque attacks that killed 51.

But with an economic slowdown in recent years that has proved longer and deeper than expected, questions are being raised about New Zealand’s outlook.

And with an election called for September 2020, global attention is turning once again to New Zealand.

In this special report, we look at the economic outlook for NZ in this an important year for the land of the long white cloud.

NZ enjoyed a remarkable recovery in the ten years after the global financial crisis. But the recovery topped out in 2016 and the economy has been slowing as capacity constraints emerge, costs rise, and population growth slows.

The slowdown became more apparent in 2019 as annual NZ economic growth hit a low of around 2 per cent2. That pace would be welcome in many western economies, but not in an economy which only three years earlier was growing at a 4.5 per cent clip3. The slowdown, which was worse than many had expected, reflected the sluggish global economy and the confidence sapping US-China trade war.

Looking ahead to 2020, modestly higher growth is likely, underpinned by easier monetary policy, fiscal expansion, an improving global economy and a recovery in business confidence.

But it’s not clear how long the recovery will last.

“We don’t see a massive nor prolonged bounce in growth,” says Bevan Graham, AMP Capital’s NZ managing director and chief economist. “Capacity constraints will continue to persist, capping any significant resurgence in growth.”

AMP Capital is forecasting 2.4 per cent growth this calendar year and 2.3 per cent in 20214.

The key factor affecting the NZ outlook is the global economy. As a small, open economy with a population of just 4.9 million, NZ is highly dependent on global conditions and its capital markets rely on funding from international markets.

As the global economic outlook weakened over 2019, central banks around the world responded by easing policy. The question for us now is whether enough has been done, and how confident we can be of sustainably achieving our dual policy mandate for inflation and employment."

- Christian Hawkesby, Reserve Bank of New Zealand

 

NZ’s central bank, the Reserve Bank of New Zealand, estimates a 1 percentage point decrease in growth among its trading partners typically translates to a 0.6 percentage point decrease in New Zealand’s growth5. And that change flows through quickly to people’s everyday lives.

The economy’s exports are traditionally driven by the primary sector, led by milk, meat and forest products, and have benefited in recent years from higher prices driven by pork supply problems in Asia and dry summers globally driving up dairy prices.

 

NZ has also enjoyed lower import prices as the global economy slowed, leaving the economy with favourable terms of trade.

While the country’s trade relations are strong predictors of growth, the composition of exports and imports are changing.

For the first time last year, tourism overtook dairy to be NZ’s number one export and the technology sector is expanding faster than much of the rest of the economy. Technology is now NZ’s third largest export sector6, growing 11 per cent to NZ $8 billion annually7.

This changes NZ’s outlook. Commodity exports are subject to global price movements, but volumes stay relatively stable year-to-year. However, services like tourism are subject to demand fluctuations that can further expose NZ to global events. RBNZ says visitor numbers flatlined in the middle of 2019 as Chinese and American tourists stopped travelling amid trade tensions. The China-based coronavirus also poses a specific threat to tourism.

NZ’s open financial markets also expose its economy to the world.

Like many Western countries, NZ is a net borrower, relying on international capital to fund consumption and investment. In recent years, it has benefited from relatively stable and historically low funding costs, while it’s floating exchange rate successfully acts as a buffer.

“It’s a kind of Goldilocks inflation – neither too hot nor too cold. Consistent with continuing accommodation in monetary policy, despite the inflation impulse from expected fiscal stimulus.”

- Bevan Graham, AMP Capital
 

“In summary, the trade and financial channels do not look like they have been a drag on New Zealand’s growth,” RBNZ Assistant Governor Christian Hawkesby told a conference earlier this year.

“If anything, they have helped insulate our economy from the global slowdown, helped in part by our shift to an easing bias in early 2019.”

The key question is what happens next, with the RBNZ noting risks to the economy were tilted to the downside and committing to add further monetary stimulus if needed. The official cash rate is currently at 1 per cent, relatively high compared to other western economies.

The outlook is clouded by an unclear domestic picture and an economy adjusting to policy changes.

As the Ardern government clamps down on immigration, growth in the number of people available for work is declining which is having an impact across the economy.

RBNZ is forecasting annual net immigration of working-age people to fall from 40,000 in 2018 to as low as 28,000 in 2021 and expects the decline to be a contributor to lower GDP growth8.

 

But that decline is being offset by declining demand for labour as the economy slows, leaving the unemployment rate low at 4.2 per cent. Little change is expected in 2020.

AMP Capital believes that rate is in line with estimates of full employment which should see wage growth slowly move higher.

RBNZ concurs, saying employment is currently “near its maximum sustainable level”, causing annual wage inflation to rise to around 2.6 percent in early 2022 as the labour market tightens.

Wages growth is also likely to be supported by the Ardern government’s policy to lift the minimum wage to NZ$20 an hour by 20219, which will be one of the highest levels relative to median wage in the OECD10.

Those wage gains will start to see inflation ticking higher again, although RBNZ says the minimum wage increase itself will be mostly absorbed in firms’ margins.

Inflation reached its lowest point in more than a year last September when the annual rate came in 1.5 per cent. It is expected to head back to more than 2 per cent in the first half of calendar 2020, with headline inflation of 2.2 per cent in the year to March 2020 and holding above 2 per cent over 2020 and into 202111.

“It’s a kind of Goldilocks inflation – neither too hot nor too cold,” says Graham. “Consistent with continuing accommodation in monetary policy, despite the inflation impulse from expected fiscal stimulus.”

That benign outlook hides some concerns. Underlying inflationary pressures are on the rise domestically, with non-tradeable inflation – headed by higher prices for property rates and rentals – running at more than 3 per cent per annum12. Tradeable inflation is keeping a lid on the headline figure.

Rising home prices have become a political lightening rod but they are underpinning a brighter outlook for NZ businesses, which have also been buoyed by government promises to lift spending on infrastructure.

The Ardern government’s novel approach to budgeting – the so-called Well-Being Budget – prioritises a range of quality of life measures over traditional short-term economic measures.

The five current priorities are funding mental health services, reducing child poverty, lifting employment among the indigenous Maori, transitioning the economy to cope with climate change and investing in hospitals and schools.

The true impact on the economy of the new approach remains to be seen but there is optimism from some – notably the OECD – that lifting well-being could lift aggregate demand.

That all means the RBNZ is likely to hold monetary policy steady going through 2020, according to Graham, after cutting interest rates by a total of 75 basis points over May to August in 2019, as fiscal policy steps up late in the cycle.

Important Notes

While every care has been taken in the preparation of these articles, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in them including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. Performance goals are merely goals. There is no guarantee that the strategy will achieve that level of performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. These articles have been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. They should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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