Economy off boil, facing headwinds

THE ‘‘ferocious’’ and unexpected slump in global dairy prices, a levelling off in the Canterbury quake rebuild and falling confidence means the economy is cooling down fast.

Westpac Bank economists say they now expect GDP growth to drop from 3.3 per cent to below 2 per cent a year ‘‘in short order’’.

Unemployment would rise to 6.5 per cent, wage rises would be low and the housing market would slow, Westpac said in its latest Economic Overview report.

But there were also reasons to expect a slight recovery in 2016, with some recovery in dairy prices by then. And the real circuit breakers would be lower interest rates and a lower exchange rate, Westpac said.

On Monday, both the Bank of New Zealand and former NZIER principal economist Shamubeel Eaqub said they also expected growth of about 2 per cent, despite the big dive in dairy incomes.

Westpac repeated that it expected the Reserve Bank’s official cash rate to be slashed to 2 per cent and the dollar would remain ‘‘under downward pressure’’.

‘‘That should provide some relief, so we have been able to forecast a modest recovery in GDP growth from mid-2016 onwards,’’ Westpac chief economist Dominick Stephens said.

The economy grew a paltry 0.2 per cent in the March quarter and the June quarter may tick higher as temporary factors from March unwind. ‘‘But that will be blip,’’ Stephens said.

The economy would worsen markedly in the second half of this year and in early 2016, facing two big headwinds – low dairy prices and a slowing Canterbury rebuild.

Westpac had radically slashed its dairy farmer payout forecast to just $3.70 a kg, from $5.70 only three months ago. That implied dairy export revenues would be down more than $3.5 billion, about 1.5 per cent of GDP.

The payout would be well below break-even for many dairy farmers. A second season of low payouts would force more cut backs in farm spending.

As well, the Canterbury rebuild, which had driven the economy in the past few years, was now ‘‘peaking early’’, about 9 months sooner than expected.

House building plans had slowed, with consents in Canterbury down about 25 per cent since late last year. Meanwhile, jobs growth had slowed. Business confidence had also taken a knock, especially for agriculture. That was expected to fall further as dairy farmers’ cashflows tightened up. Confidence had also fallen among building firms.

‘‘We expect Auckland house price inflation to slow later this year,’’ Stephens said.

The dairy payout downturn could see house prices fall in dairying regions such as Taranaki and Southland. But overall, Westpac forecast national house price inflation of 4.5 per cent next year, down from 10 per cent.

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