The almost good, the slightly bad, and the really ugly

Recent updates on business sector conditions indicate that the economy is continuing to muddle along. However, we’re not seeing signs of the re-acceleration in GDP growth that government agencies are banking on. This week, we also look at the impact of minimum wage changes, and Auckland’s growing housing shortage.

Activity muddling along

For some time we’ve been highlighting that GDP growth over the next few years is likely to be slower than both the NZ Treasury and the RBNZ are assuming. We expect that growth is going to slow from rates of around 3.5 to 4% in recent years, to around 2.8% over 2018 and 2019. In part, that reflects some developments that are already underway, including increasing capacity constraints in the construction sector and a gradual slowdown of population growth from the current rapid pace. We also expect that the housing market will cool, putting a dampener on consumer spending.

With this in mind, the latest Quarterly Survey of Business Opinion provided some interesting reading. While business confidence has picked up as the uncertainty around last year’s election has faded, it remains lower than the levels we saw over the past few years. Importantly, both trading activity and forward orders remain down on the levels we saw through 2016 and early 2017. Overall, we’re left with a picture of an economy that is continuing to muddle along. However, we’re not seeing signs of the re-acceleration in activity that government agencies are banking on. And that’s also the message we’re getting from other surveys of business conditions, including the latest PMI.

Consistent with signs that the momentum in economic activity is softening, we’ve also seen some easing in businesses’ hiring intentions, and firms have reported less difficulty finding labour. However, at least at this stage, businesses’ investment intentions have been a bit more resilient than we might have expected.

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