Quarterly Economic Forecast: Growth slowed by dairy weakness

Monday, 16 November 2015, 11:40 am
Press Release: ASB Bank

Media release

ASB Quarterly Economic Forecasts November 2015

EMBARGOED UNTIL 5am Monday November 16, 2015

Growth slowed by dairy weakness

• The growth outlook has softened, as dairy production contracts and businesses become more cautious.

• Strong net migration likely to push the unemployment rate higher, keeping wage and domestic inflation pressures low

• Mild inflation outlook provides scope for the RBNZ to cut the OCR below 2.5%

Dairy weakness is weighing on the outlook for New Zealand’s economic growth, which has softened slightly in the latest ASB Quarterly Economic Forecasts.

The bank, in the November report, says dairy incomes will be squeezed this year and dairy production is already contracting sharply, directly dragging on GDP growth.

Business confidence has fallen, with an uncertain outlook threatening to delay hiring and investment plans.

While tourist inflows and strong population growth have supported retail spending growth, per-capita spending has slowed.

ASB chief economist Nick Tuffley says the bank’s economic outlook is for moderate growth, although the economy still faces a number of risks.

“We expect overall growth to slow to a low of 2.1% in early 2016 before gradually recovering through the twin tailwinds of lower interest rates and exchange rates,” Mr Tuffley says.

“We still fully expect growth to recover over 2016, and much of the seeds for this future growth have already been sown through the considerable fall in the NZD and string of interest rate cuts.”

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Strong net migration

Net migration continues to run at record levels, but slowly the sands are shifting the report says.

Strong population growth is fuelling an increase in the labour supply. But against a back drop of slowing labour demand, the unemployment rate will rise.

“This extra slack in the labour market will keep a lid on wage inflation pressures and provide an extra drag to domestic inflation when inflation pressures are already so low,” Mr Tuffley says.

Watchful eye on global risks

Although the growth outlook for New Zealand’s key trading partners remains reasonable, it still has the usual stress fractures, Mr Tuffley says.

“Question marks still hang over China’s growth outlook. Looming US interest rate increases have increased nervousness about the potential impact of capital flight on emerging economies, and rising servicing costs of USD-denominated debt.”

Scope for further interest rate cuts

Due to low inflation and subdued global backdrop, a low interest rate environment will prevail for 2-3 more years.

“In fact, our inflation outlook is so low now that it is screaming out for us to forecast lower interest rates than we are.”

ASB economists, in the report, think it is likely the RBNZ will cut the OCR to 2.5% in December, with the risk the OCR gets cut further over the course of 2016.

“In the absence of OCR cuts, we sense a foregone opportunity for the economy to grow a little faster in an environment of still-benign inflation.”

ENDS

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