Economic headwinds set to blow

Westpac forecast follows other downward revisions for 2018

The Government will face economic headwinds next year, according to Westpac economists — who join a growing list of analysts downgrading the short-term outlook for GDP growth.

But Westpac’s long-term forecasts are more positive, with GDP growth revised up for 2019 and 2020.

“The Government’s plan to increase spending will certainly boost the economy, although crowding out of the private sector must also be considered,” said Westpac chief economist Dominick Stephens.

“Meanwhile, the Government’s various plans to cool the housing market and reduce net migration will slow the economy next year.” In its latest quarterly Economic Overview Westpac has revised down its GDP outlook for 2018 to just 2.4 per cent from 2.6 per cent in the previous report.

This follows downward revisions for 2018 from ASB, ANZ, BNZ and Goldman Sachs.

Goldman, like Westpac, revised up its longer term forecasts.

Last week ANZ’s outgoing chief economist Cameron Bagrie said: “The chance of a near-term wobble in growth is increasing.”

But he also remained optimistic about the longer term trend.

The central dilemma for economists has been trying to pick the net effect of policies which have both positive and negative impacts on inflation and growth.

The Westpac report divides the Government’s new policies into three strands: specified policies with direct impact on the consumer price index, policies that will affect inflation through broader economic conditions and polices yet to be specified but that are in line with its stated intentions.

Those with direct effects included plans to introduce free tertiary education. Westpac estimated that would knock 0.2 per cent off the CPI in 2018, with a smaller impact in subsequent years as tertiary education’s weight in the index shrinks.

That change will outweigh two positive inflation influencers — the Auckland fuel tax and the rise in the minimum wage, the Westpac report said. The fuel tax would add 0.06 per cent to the CPI but should be offset partly by the removal of the transport levy from rates bills.

The Government plans to raise the minimum wage to $20 an hour by 2021. The first increase next year will add around 0.2 per cent to the labour cost index, although the impact on the CPI is just one third of that.

The Government’s fiscal spending plan — including $7 billion of additional borrowing over the next four years — is expected to provide a substantial boost to GDP over 2019, Westpac said. But the spending programme would take some time to “ramp up”, the report noted.

But with National’s tax cuts cancelled and several policies outlined to dampen the housing market — including a likely tightening of visa requirements for migrants — the combined effect is an inflation forecast that remains below the Reserve Bank’s 2 per cent target next year.

The report noted that health and education were due for a big bump in government spending. That points to the big change being a rise in the government expenditure as a percentage of consumption in GDP accounts — from 2 per cent to 4 per cent.

Calculating the impact of extra government consumption on GDP is complex.

For example some of the new spending would go on imports with no contribution to GDP and some on wages which do boost GDP.

But there was also risk of a “crowding out” effect, Westpac said, where government spending displaced growth in the private sector.

For example the private healthcare sector may see less growth as a result of more public provision.

Westpac concluded that on balance the official cash rate was likely to stay on hold until late 2019.

“Indeed we think if there were any change to the OCR next year it would more likely be a cut than a hike.”