Game changer

The New Zealand economy lost some momentum in the second half of last year, and looks to have remained subdued in the early part of this year. But our latest quarterly Economic Overview highlights that some change is already on the way. Lower interest rates will help to boost the housing market and spur consumer demand. Combined with the already-planned fiscal stimulus, we expect this to lift growth above 3% again in 2020.

New Zealand's GDP growth has slowed from a peak of 4% in 2016 to around 2.5% today. Initially, the slowdown was led by consumers reacting to a cooling housing market. House price inflation peaked at 15% in 2016, but has since slowed to around 2% nationwide, largely due to a flattening off in prices in Auckland and Canterbury. The pace of growth in household spending has accordingly slowed from its peaks, though it continues to be supported by household income growth via rising employment and wages.

In more recent times the slowdown has become businessled. Surveys of business confidence have been sharply weaker since the change of government in late 2017, but only recently have there been signs of this manifesting in business decisions. Even though firms are citing capacity constraints and difficulty in finding workers, growth in business investment has been sluggish and private sector job advertisements have flattened off.

No doubt some of this grumpiness relates to dissatisfaction with Government policies that have added to business costs, such as minimum wage increases, changes to employment law, and increased regulatory requirements. But an equally important aspect is that firms are not confident about their ability to pass on these cost increases. Technology changes and international competition have put more power in the hands of consumers, and moreover, demand isn't expanding quickly enough for firms to be able to justify price rises. As a result, firms are seeing a squeeze on their profitability and are scaling back their expansion plans accordingly.

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