Escaping the bind

Last week we released our latest quarterly Economic Overview. As always, it’s a compact but comprehensive summary of our views on the New Zealand economy.

Three key developments have informed our latest thinking: the recent commodity price downturn, the intensifying housing shortage in the Auckland region, and the absence of inflation. Combined, they add up to continued solid, albeit uneven, economic growth, supported by a more muted hiking cycle from the RBNZ.

Sharply lower dairy and forestry prices are certainly going to make life difficult for some New Zealand regions and sectors over the next year. Compared to a ‘normal’ dairy payout in the low $6 range, the $4.80 payout we expect for this year’s season represents a revenue loss of about $2.5bn for the industry. Add the hit to log exports and the likely flow-on effects to confidence and government revenues, and the impact on economic activity could plausibly exceed 0.5% of annual GDP.

But construction activity is going gangbusters, fuelled by the Canterbury rebuild, burgeoning construction activity elsewhere, and booming net immigration. Net immigration has continued to exceed even our bullish expectations, and we now expect the annual rate to reach an unprecedented 55,000 in the first half of next year. The resulting population growth has seen the Auckland housing squeeze get noticeably tighter, despite the increase in building we have already seen in the region. In recognition we have significantly upped our forecasts for Auckland residential construction – and even on that assumption Auckland’s housing shortage is likely to get worse before it gets better.