Economy cools, but support is on its way

Tuesday, 18 August 2015, 12:46 pm
Press Release: ASB Bank

Economy cools, but support is on its way

• Economic momentum fading as Canterbury construction activity peaks and dairy incomes decline
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• But lower interest rates and lower NZ dollar should offer support
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• ASB expects expect calendar 2015 growth of 2%, rising to 2.9% in 2016
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New Zealand’s economy has cooled and growth over 2015 will be modest compared to last year, according to the latest ASB Quarterly Economic Forecasts.

Contributing to the slow-down is a combination of dry summer weather, weak dairy prices, and a levelling off in Canterbury construction activity.

But ASB Chief Economist Nick Tuffley says the economy is getting a little help from its usual friends: interest rates and the lower NZD are both falling.

“The lower NZD will support growth from non-dairy exports while low interest rates will stimulate household demand,” Mr Tuffley says.

“Falls in both will help prop up growth, particularly over 2016. We expect calendar 2015 growth of 2%, rising to a healthy 2.9% in 2016 – hardly an economic meltdown,” Mr Tuffley says.

More OCR cuts likely
The big shift of the past few months has been further considerable weakness in dairy prices, coupled with a broader backdrop of benign inflation pressures. Consequently, the risk of Official Cash Rate (OCR) cuts has become reality, Mr Tuffley says.

“We expect further cuts over the next few months to take the OCR back down to 2.5%, its post-financial crisis and post-Canterbury earthquake low. An even lower OCR is conceivable.”

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Dairy export growth is likely to remain slow
Ongoing dairy price weakness, and the likelihood that their recovery is more modest and distant, alter the spending outlook for regions dependent on dairy incomes. “Strong global dairy supply growth remains a headwind to a recovery in prices and confidence in the dairy sector is likely to remain weak for some time,” Mr Tuffley says.

International outlook
Near-term wobbles and political risks have dominated some of the market focus of late, but this has generally masked gradual improvement in global growth, for the most part, Mr Tuffley says. “On balance, we continue to see gradual economic recovery from our major trading partners.”

Plenty of positives
Mr Tuffley points to a number of positive factors for economic growth:

- The trade-weighted exchange rate has fallen 16% from its high a year ago, with much of the fall happening since April.

- Export industries across the board have become more competitive in a relatively short space of time as a result.

- Tourism, now vying to be our biggest foreign exchange earner, is going from strength to strength.

- The kiwifruit industry is also recovering from the blight of Psa.

Domestic drivers remain positive
Meanwhile, other domestic drivers will remain positive.

- Net migration flows will remain relatively strong over the next year, supporting consumer spending

- Cashflows for borrowers, including beleaguered dairy farmers, will be bolstered by falling interest rates, helping to support overall spending.

“There are undoubtedly parts of New Zealand that will feel pressure over the next year. But changes are occurring which will help over time,” Mr Tuffley says.

ENDS

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