Mixed fortunes

A major theme of our outlook for the New Zealand economy is that the dairying downturn and the peaking of the Christchurch rebuild will weigh on confidence, and drive a slowdown in growth over the next couple of years. Last week’s events had a direct bearing on those themes, though with some wildly differing implications.

Business confidence has indeed fallen sharply – the August survey showed confidence at its lowest level since mid-2009, when the economy was just starting to emerge from recession. Not surprisingly, confidence has fallen to record lows in the agricultural sector, but the decline over the last several months has been consistent across every sector. (Construction sector confidence rose in August, but it remains well below where it was even a few months ago.) Businesses also reported that they are winding back plans for hiring and investment, and fewer expect to be able to raise their prices. There are clearly concerns that the dairying downturn will have significant fallout for the wider economy.

However, in the last week we have also had a reasonably strong run of hard indicators of economic activity relating to June or July. Consents for new dwellings rose 20% in July, breaking out of the flat trend over the last year. Auckland was a major contributor to this growth, as building activity edges closer to the levels needed to meet population growth (though still about 25% shy of where it needs to be). Consents in Canterbury also rose for a third straight month, though they are still well below the peak reached late last year.

The building work survey for the June quarter reinforced the fact that the building industry is still in growth mode at the national level. Work put in place rose by 1.6% for the quarter, led by a 5% increase in non-residential construction (possibly related to quake strengthening). This puts a slight upside risk to our forecast of 0.7% GDP growth for the June quarter, but we will finalise this number next week once the last few industry reports are released.