The turning tide

Last week we launched our latest quarterly Economic Overview, titled “The tide has turned”. Our view of the New Zealand economy has evolved substantially over the last few months, as the downturn in world dairy prices has deepened and the post-earthquake rebuild in Christchurch appears to have plateaued sooner than expected. The unexpected loss of momentum in these two areas will be a blow to business and consumer confidence, which we expect will see GDP growth fall to below 2% and the unemployment rate rise to 6.5% by next year.

Crucially, however, all of this is happening in an environment of ongoing low inflation. This means that the Reserve Bank has plenty of scope to ease monetary conditions during this soft patch. Lower interest rates would also put downward pressure on the NZ dollar, which will be essential to bringing inflation back up towards the RBNZ’s target midpoint. Together, the expected stimulus of lower interest rates and a lower exchange rate mean that we are able to forecast a modest recovery in GDP growth from mid-2016 onwards.

We’d point out that the forecasts in our Economic Overview are based around a blow to confidence that originates in the business sector (especially in agriculture), with knock-on effects for the household sector over time. We had no expectation that households would be feeling the pinch at this stage, so last week’s batch of householdcentric data doesn’t challenge our views one way or another.

The latest REINZ figures show that the housing market remained in fine form in July. House sales rose to a new cycle high, average time to sell fell to a new cycle low, and prices rose in most of the broad regions. Picking any turning point in house prices is difficult due to the quality and volatility of the data. For instance, there have been a handful of measures suggesting that the median Auckland house price fell in July. But all of these can potentially be distorted by the composition of the houses being sold. And indeed, there’s some evidence of a surge in sales of lower-end properties in July, which might suggest a flurry of demand from property investors ahead of the new lending and tax rules that come into force later this year. For this reason we prefer measures that attempt to adjust for quality, such as the REINZ’s stratified house price index, which showed a further rise in Auckland house prices in July.