Wednesday, 29th May, 2019

Global growth has slowed further, and NZ’s expected pick-up is taking its time arriving.

With NZ’s economy not performing to its full potential, it can be given a further nudge to spur the pick-up.

We expect a further interest cut in the second half of this year.

A loss of momentum is creeping in globally. It’s more a case of a below-par performance rather than anything dramatic. But here in NZ we have reached the point where more policy stimulus is required to boost growth. We still expect the economy to start picking up, but it is taking slightly longer to happen than anticipated.

The global economy is cooling after a period of above-average growth. Growth for 2019 and 2020 is expected to be below-average. And, unhelpfully, the big distracting sideshows of the past year remain. US-China trade tensions have escalated to DEFCON 1. The US is back to imposing added tariffs on Chinese imports, which China is not taking lying down. It is still possible the world’s two biggest economies do end up coming to an agreement. But right at this moment it is hard to read.

And, two years to plan an orderly exit from the EU is clearly not enough time. After a farcical pantomime that even Monty Python wouldn’t have the depth of imagination to script, the UK has been granted a Brexit extension until the end of October. That simply extends the period of uncertainty UK businesses have to contend with.

Domestically, there are still some good drivers. Export prices remain high, notwithstanding the softening of global growth, and we remain positive about the export price outlook. Interest rates are historically low. Population growth is still fairly strong – we think anyway, though the new migration measurement means we are guessing to some extent. The 2018 Budget delivered some added stimulus that will increasingly come into effect.

But there are challenges. Business confidence remains woefully low through a combination of challenges in finding suitable staff, cost pressures, and continued uncertainty around government policies. One source of uncertainty, the imposition of a broad-based capital gains tax, has at least been taken off the table and will likely dampen the recent flare-up of business angst. Low interest rates are providing a boon for borrowers, but a headache for savers.

With recent economic growth modest, inflation and wage pressures muted, and with some slack within the labour market, it is clear the economy has scope to grow faster. Short of additional policy stimulus, it is difficult to identify catalysts that will achieve this. Capacity constraints mean that the construction sector can’t flex much more, despite the strong pipeline of work. Fiscal policy is unlikely to shoulder any more of the load, given the Government’s commitment to its debt target. The RBNZ is expected to continue to do much of the heavy lifting, which should keep NZ interest rates historically low. We expect a further OCR cut in the second half of the year. Over the next few years, this stimulus will be whittled away as the higher bank capital requirements proposed by the RBNZ push up customer borrowing interest rates. In the meantime, though, it should provide a bit of a pick-me-up.