Westpac Institutional Bank Team
Westpac Institutional Bank
Our last Weekly Commentary for 2019 is a double issue. The first couple of pages are our usual round-up of recent economic developments. Then on page three we detail an update to the OCR outlook, which was published shortly before this Weekly Commentary went to press. The Weekly Commentary will be back on 20 January 2020. Until then, we wish our readers a great holiday season!
Last week the Government released its Half-Year Economic and Fiscal Update (HYEFU). With the economy losing steam over the past year and the 2020 election coming into sight, we've been expecting a ramp up in fiscal spending. And that's exactly what the Minister of Finance delivered, with the announcement of $12bn of new investment spending. The lion's share of that new spending will be on transport projects ($6.8bn). Smaller amounts will go to District Health Boards, school maintenance, regional investment opportunities, and decarbonisation projects (like removing coal-fired boilers from schools and hospitals).
These planned increases are still modest relative to the size of the economy. Even with the increase in spending, the net debt to GDP ratio is expected to remain close to its current level and well within the 15-25% range that the Government has adopted in its fiscal responsibility rules. In addition, rather than trying to front-load that spending in response to the recent period of slower economic growth, the planned spending is actually spread out over several years. Around $1.4bn is expected to be spent in the June 2021 year, ramping up to just over $2bn in each of the next few years.
These announcements reinforce our view that government activity will stimulate the economy over the coming years. However, we had already allowed for something like this, so there will be no material change to our economic forecasts. Indeed, as we've seen for several years now, capital spending often gets delayed due to capacity constraints in the construction industry. Consequently, the actual economic stimulus implied by these latest announcements is well within what we had already baked into our forecasts.
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