New forecast Where the economy is heading

ASB’s quarterly forecast predicts wage growth under new Govt

Next year could be a good one for getting a pay rise, according to ASB’s latest quarterly economic forecasts.

ASB economists have lifted their forecasts for wage growth in the wake of the election, although the outlook for GDP growth has been revised down slightly.

“Slower population growth will result in slower demand growth for housing and services,” the report says. “However weaker labour force growth will likely tighten the labour market and push up wages.”

On top of that pressure, the proposed minimum wage rises — from $15.75 an hour to $20 by 2021 — combined with pay equity settlements will also boost wage growth, the ASB team notes.

That should boost household incomes which should in-turn support per capita consumer spending.

However, some headwinds were likely from the softer housing market, which would weigh on consumer confidence and slow the demand for major purchases.

The net result of this was ASB adjusting its annual GDP growth track down. Real GDP is now forecast to peak at 3.2 per cent by December next year, having previously been forecast to hit 3.7 per cent by then and peak at 3.9 per cent by March 2019.

The new GDP forecasts see lower growth right through 2018.

Meanwhile, the track for wage inflation has lifted and is now expected to peak at 2.3 per cent by December 2018, compared with the previous forecast of 2.1 per cent.

While that doesn’t sound like a massive boost for your pay cheque, it starts to look good against forecast falls in consumer price (CPI) index inflation.

Where ASB previously had CPI inflation at 1.6 per cent by December 2018 it is now forecast to dip to just 1 per cent. That means the lift in real (inflation adjusted) wage growth looks even better.

The report does note that there is still a great deal of uncertainty about the new political environment and “many policy details remain light”.

Globally, though, it looks as if the new political regime may have some fair economic winds.

“Improving global incomes will help support New Zealand export demand,” the report says. “We expect NZ merchandise Terms of Trade [export prices relative to import prices] to remain near historically high levels.” The global outlook had turned a corner with improved prospects in China underpinning growth.

ASB expects Chinese GDP to grow at 6.8 per cent over 2017. The outlook for the US, Australia, Europe and Japan has generally firmed.

“All up, the combined economic prospects of our trading partners continue to improve,” the report says.

“Consensus forecasts for growth of our trading partners lifted to 3.7 per cent.”

That is marginally above the longterm average.

The New Zealand dollar dipped sharply after the election, however the quarterly forecast has it rebounding over the coming year to trade between US71c and US75c.

ASB said the new Government’s review of the Reserve Bank Act had “muddied” the outlook for interest rates. However, for now it sees the Official Cash Rate staying at 1.75 per cent (where it has been for a year) for all of 2018.