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Fading momentum

Significant changes in economic policy are on the cards for 2018. At the same time, several key drivers of economic growth have been dissipating and consumer confidence has dropped away, writes Westpac senior economist, Satish Ranchhod. 

These changes don’t mean that the economy is about to topple over. But the pace of economic growth is likely to slow, and this will make it harder for many businesses to drive increases in sales.

Looking first at the political environment, the new Government is planning to introduce some significant policy changes over the coming years. That includes large increases in spending, which over time will boost demand (at least temporarily). However, such spending increases are still some way off. And over the coming year, we expect that changes in Government policy will actually have a dampening impact on economic activity. The key reason for this relates to the suite of planned policies that will weigh on housing market activity, and which will likely have flow-on downside impacts for consumption spending. The change in the political environment has also resulted in increased nervousness among businesses, which will likely see them holding off on investment spending and hiring for a time.

On top of the change in Government, we’ve also seen some of the key drivers of growth in recent years starting to dissipate. That includes a levelling-off of construction activity (albeit at high levels). It also includes a turn in the migration cycle, which will be particularly important for retailers.

For the past few years, migration-led increases in the population have given spending a powerful boost. But while annual net migration is still elevated at over 70,000, monthly net migration flows have been dropping back, and they’re set to fall sharply over the next few years. The main reason for this is that many of those who arrived in previous years came on temporary student and work visas, and they are now departing. And with a large increase in arrivals in recent years, we expect a proportionately large ‘echo’ of outflows over the coming years. At the same time, the improving global economy has seen new arrivals levelling off, and is encouraging New Zealanders to travel abroad. Importantly, the downturn in net migration has begun even before the new Government has tightened migration settings, and expected policy changes will reinforce recent trends.

This turn in net migration will moderate a key driver of demand growth that businesses have enjoyed in recent years. It will also reduce the pool of available workers in some lower skilled occupations, with a related lift in wage pressures.

With big changes in policy on the cards and the momentum in the economic activity fading, it’s unsurprising that we’ve also seen consumer confidence falling sharply in recent months. Importantly, this nervousness looks like it’s putting a dampener on spending plans. As part of the latest Westpac McDermott Miller Consumer Confidence survey we asked households about their spending plans. The number of households who think it’s a good time to buy a major item has fallen sharply. We’ve also seen a small drop in households’ spending on leisure activities like dining out. Putting this together with the other changes we’re seeing in the economic environment, this signals a softer environment for retail spending over the coming year.

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