Economic Growth to Slow Further

15/02/2016

New Zealand's weak economy is being attributed to weak dairy prices, slower construction growth, and uncertain global conditions. While the tourism industry continues to soar, falling interest rates and a lower New Zealand dollar have not been enough to speed up the local economy. According to Nick Tuffley from ASB, New Zealand is only growing because of migration, with the chief economist saying "On a per-capita basis, there has essentially been no growth over the past year."

While the Reserve Bank has made direct moves to stimulate growth by dropping interest rates, the economy has not responded as expected. Reserve Bank Governor Graeme Wheeler recently left the official cash rate at 2.5 percent, saying further reductions may be needed if inflation takes longer to return to the bank's target range of 1-3 percent. The strength of the New Zealand dollar is also causing endless frustration for the Reserve Bank, with the Kiwi recently trading at US66.38 cents.

According to Satish Ranchhod, Senior Economist at Westpac, inflation is likely to remain low for some time: "Headline inflation has been below the bottom of the RBNZ's target band for over a year now. And it's set to push even lower. In fact, it's likely the latter half of 2016 will see annual inflation dropping to around 0 percent, with a very real risk it goes negative... With a range of domestic and offshore factors dampening prices, we don't expect inflation will be back inside the RBNZ's target band, let alone close to 2 percent, until 2017." 

According to Tuffley from ASB, further interest rate cuts are needed to help bring inflation back into the target zone: "Declines in interest rates and the NZD over the past year will help support growth - and further rate cuts later this year should provide an extra boost, ensuring inflation lifts more firmly back into the RBNZ's target." Despite lacklustre growth in the construction sector over the last few months, there is a strong outlook for construction spending in Auckland as the year progresses. Domestic demand is also picking up across the country, with the tourism boom not likely to stop any time soon.

Global market conditions also continue to affect the local economy, with financial markets experiencing a truly rocky start in 2016. According to ASB, "Concern about China's economic growth, in particular, has spilled into sharemarkets foreshadowing what is shaping to be a bumpy ride this year for the global economy." While most commentators expect the interest rate cutting cycle to resume in June, weak growth or inflation figures could force the RBNZ to act sooner.

 

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