NZ economy: areas are throttling back, RBNZ hikes in H2 2018? - Westpac

Analysts at Westpac explained that the New Zealand economy is now into its seventh year of expansion. 

Key Quotes:

"While we do expect the growth to roll on, there are a number of areas in which the economy is throttling back.

First, the housing market slowdown has intensified. Prices are down 4% in Auckland since the January peak, and prices have flattened elsewhere. And second, residential construction activity has surprised us by levelling off at a time when further rapid growth was anticipated.

The connecting thread between the two is credit – both its price and its availability. The global environment is one of rising interest rates, and that has dragged New Zealand’s fixed mortgage rates higher. Meanwhile, difficulty attracting deposits has made New Zealand banks choosier about who they will lend to. When credit is tight, both property development and property purchases are more difficult. We expect that the housing market will remain subdued, and that will have the usual flow on to consumer spending and the wider economy.

The positive counterbalance to all of this is the smiles that have appeared on farmers’ faces as global soft commodity prices have risen over the course of this year, which is good news for rural regions and will boost the wider economy.

But with export success comes a higher exchange rate. That is one of many factors that will tend to keep inflation quiescent over the coming two years. This quarter we have reduced our GDP growth and inflation forecasts, meaning we see even less scope for the RBNZ to hike the OCR. Financial markets are priced for OCR hikes in the second half of 2018, but we view that as quite a distant prospect.

Of course, the big uncertainty will be the September election – this quarter’s special topic covers how various election outcomes might affect our forecasts."