The pace of economic growth has taken a step down as conditions in the New Zealand economy have become increasingly mixed.
Earlier in the decade, New Zealand was an outperformer on the global stage, with GDP growth running at rates of around 3.5 percent to 4 percent p.a. That was well ahead of what we were seeing in other developed economies, including Australia and the US.
However, after an extended period of solid growth, the New Zealand economy has entered into a more ‘mature’ phase. While economic activity is still expanding, conditions in the New Zealand economy have become increasingly mixed. This has seen the pace of economic growth slowing to 2.7 percent in the early part of 2018. That’s the slowest pace since 2014.
Among the key changes we have seen in recent months has been the cooling in the housing market and slowdown in construction activity. Business and household confidence have also fallen, pointing to further softness ahead. Balanced against those factors, demand is continuing to be supported by firmness in export earnings and large increases in Government spending.
Slowing economic growth has seen New Zealand’s position on the global stage slipping from ‘rock star’ to ‘support act.’ Notably, we’re now underperforming the Australian economy, which expanded by 3.1 percent over the past year.
The changes in New Zealand’s relative standing in the global economy will have some important implications. One key area that will be affected is net migration, which rose to record levels in recent years, boosting spending and our productive capacity. With economic growth and employment now easing off, New Zealand is no longer looking as attractive as other locations like the US and Australia. This has already seen net migration easing back from the highs that we saw over the past year, and we expect that it will slow substantially more over the next few years. This will exacerbate the more general softening in economic growth.
The other area where the New Zealand economy’s underperformance will really matter is the exchange rate. The NZD/USD has already dropped back over the past year. We expect it will fall to around US$0.64 cents over the coming year as interest rates push higher in the US.
In the retail sector, changing economic conditions – especially the slowdown in the housing market and rising fuel prices – have already been dampening spending. In fact, adjusting for normal seasonal variation, retail spending levels have essentially been flat since the start of this year.
Looking forward, we expect to see modest growth in household spending levels over the coming year. Spending continues to be supported by population gains (though this impulse is starting to ease), and increases in government support payments will also provide a boost to the incomes of many families. However, the strength of household demand will be challenged by further softness in the housing market. Many retailers will also be wrestling with increases in costs stemming from the fall in the exchange rate, rising fuel prices, and increases in wage pressures.
Satish Ranchhod, Westpac senior economist