NZ: Slower growth, tougher choices – Westpac

New Zealand’s economic growth has slowed to a more modest pace this year, and it’s increasingly likely that it will fall short of the quite optimistic official projections, according to analysts at Westpac. This will have left the new Government with some difficult trade-offs as it prepared its first fiscal update, for release this week, they further add.

Key Quotes

“In recent days we’ve had the last of the major indicators for September quarter GDP, which will be published later this month. Overall, the results were solid but not spectacular. Residential building rose by 4.1% in the quarter, following two small declines that may have been affected by the unusually wet weather over the first half of the year. Nonresidential building work rose by 0.6% nationwide, with the quake rebuild winding down in Canterbury but activity picking up elsewhere. Wholesale trade rose by 1.1%, in line with the growth in recent quarters, and manufacturing activity recorded solid gains outside of a drop in meat and dairy processing.”

“We’ll finalise our GDP estimate this week, but the latest data releases are consistent with our forecast of just 0.4% growth for the quarter. We should emphasise that this is not a sign of broad-based weakness in the economy. Much of it is due to a drag from the primary sectors: wet weather weighed on milk production at the start of the new season, and oil and gas extraction continued its natural decline. There was also a pullback in accommodation and hospitality, after a strong June quarter that was boosted by sporting events such as the Lions rugby tour.”

“Nevertheless, it’s fair to say that we’re not seeing particularly strong growth in other areas that could offset the weak spots. That’s even more apparent when you consider the rapid growth in the population, which is feeding demand for a range of goods and services. (Net migration started to turn down in the September quarter, but remains very high – population growth is still running at around 2% a year.) In per capita terms, the economy has barely grown at all so far this year.”

“What’s more, there are some worrying signs for growth going into the early part of 2018. As we noted last week, business confidence has fallen sharply in recent months. Some of that could be put down to a knee-jerk reaction to the new Labour-led government, but the decline began even before then and has been larger than we’ve seen during previous changes of government. There is a risk that pessimism about the economy becomes self-fulfilling as businesses hold back on hiring and investment.”

“To top it off, there’s a growing risk of drought this summer. The unusually wet weather through much of this year has abruptly turned into a hot and dry spell since November, thanks to a combination of a developing La Nina weather pattern and abnormally high sea temperatures in the south. Many parts of the country were unusually dry even before the official start of summer, and while there’s plenty of grass at the moment after earlier rains, new pasture growth has dropped off sharply in the last month.”

“Lest we sound too gloomy, we should note that we still expect the economy to grow at a modest underlying pace, beneath the quarterly volatility in GDP. The September quarter is shaping up to be the weak spot for the year, but recent activity data points to a strong start to the December quarter. There are some challenges to the outlook for next year, but the economy seems to be coming from a stronger starting point than financial markets and business surveys are giving it credit for.”