New forecast adds to economic gloom

Domestic activity slower than expected and anticipated rate cuts may need to come sooner, says Westpac

Debate over the current economic slowdown is settling at the more gloomy end, with one of New Zealand’s more upbeat economic teams downgrading its short-term outlook.

“The domestic economy has clearly slowed further than anticipated,” says Westpac chief economist Dominick Stephens in his latest report. “We now expect that the RBNZ will cut the OCR in both August and November.”

In fact, there was now some risk the RBNZ might have to deliver the cuts more rapidly, in August and September, depending on how weak the labour market gets, he said.

Firms remain caught between rising costs . . . and an inability to pass through price increases for their products. Dominick Stephens, Westpac

While they had been anticipating the current slowdown, Stephens and the Westpac team have been at the more optimistic end of the spectrum for several months.

They had expected that the economy would be picking up by mid2019, on the back of fiscal stimulus and lower interest rates.

“Instead, recent data suggests that New Zealand economic growth has remained slow, “Stephens said.

Low business confidence was translating into slower hiring, and the forestry downturn could cause job losses, Stephens said.

He noted confidence was at a 10-year low in the June Quarterly Survey of Business Opinion.

“Firms remain caught between rising costs — often governmentimposed, such as the minimum wage hike — and an inability to pass through price increases for their products,” he said. “Expected profitability in the survey dropped to its lowest since the GFC.”

In addition to survey data, there was other “harder” evidence that low business confidence is affecting the labour market, he said. “The official government series of job ads flatlined from November last year, and has actually fallen in the past couple of months,” Stephens said. “Our own count of job ads listed on Trade Me has fallen far more sharply. This is tentative data . . . but it suggests that unemployment could rise over the quarters ahead.”

Westpac economists have retained a more positive outlook on the housing market than some others and they are sticking with that call, anticipating two rate cuts will see a flow on to lower retail mortgage rates.

“In May we predicted that nationwide annual house price inflation would accelerate from 2 per cent now to 7 per cent over the year ahead, partly due to the mortgage rate declines already seen,” he said.

“If we are right about the Reserve Bank cutting the OCR to 1 per cent this year, then we can expect even lower fixed mortgage rates. That could prompt us to upgrade our house price forecast.”

Longer-term Stephens remains relatively upbeat about the prospect of an economic rebound.

A stronger housing market is like to boost consumer confidence and fiscal stimulus, so far slow to have an impact, will eventually start to boost growth.

“That is probably just [timing] — it always takes a new government time to get the wheels of the bureaucracy turning in the direction it wants.”