ASB Finishes the Year with Optimism

21/11/2018

According to ASB chief economist Nick Tuffley, "It's been a year battered by storms but the signs are there that the economy is slipping into some summertime stability... Despite two high-profile uncertainties – stubbornly-weak business confidence and escalating trade tensions between the US and China – we expect that growth in the last part of 2018 and early 2019 will be only a touch softer than what it could have been."

Business confidence dropped to a nine-year low in October, with businesses across the country noting government policy challenges, higher operating costs, softer demand, and weaker profits. According to the latest quarterly business survey by the Institute of Economic Research, 28 percent of firms expect economic conditions to worsen over the next six months, compared with 21 percent in June. There are already some signs that things are improving, however, with the ANZ Business Confidence Index lifting slightly to -37.1 in October 2018 from a decade low of -38.3 in September.

According to the ASB Forecast, business confidence is likely to keep improving in 2019: "While surveying shows us that uncertainty about Government policy is still impacting business confidence and keeping it at low levels, we are encouraged that, to date, there are few tangible signs that the plunge in business confidence has filtered through to economic growth... Capital goods imports are holding up, as is credit growth to business. And as the Government firms up key policies, over time the uncertainty business is feeling should reduce."

Other than weak domestic business confidence, ASB also mentioned rising trade tensions between the United States and China. While trade between these two countries is minimal on a global level, an escalating trade war could have a profound effect on the health of the Chinese economy and the New Zealand export and property sectors. "We need to keep wary eyes out for any slowing of Chinese consumer spending growth due to increasing trade restrictions such as tariffs placed on Chinese exports to the US," said Tuffley, with the ASB using less optimistic language for international issues. 

ASB economists are expecting interest rates to remain on hold at the record low of 1.75 percent until August 2020, which is six months longer than their previous quarterly prediction. While others are predicting the Reserve Bank to raise rates much sooner, the ASB are expecting a late and mild tightening cycle that peaks at just 2.75 percent in 2021 or 2022. According to Tuffley, "This is because the RBNZ will be mindful of not getting policy settings too far out of sync with other central banks." The Quarterly Economic Forecast also mentioned rising living costs, saying the "key test for the economy over the summer and autumn will be the ability of firms to pass on increased costs onto consumers".

 

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