In Focus

NZ will face economic obstacles in 2018 but future growth expected

Tuesday December 19, 2017 Dr Ganesh Nana

20 December, 2017. 

The incoming government has hit the ground running but will face many obstacles in 2018 as it seeks to sustain a stable economy, leading New Zealand economic forecaster BERL says.


The Treasury’s half-year economic and fiscal update had all the hallmarks of a sizable mini-Budget, BERL chief economist Dr Ganesh Nana says.

 

The update confirms pre-election calculations and conclusions that, while a tight fit with little wriggle room, there are no multi-billion-dollar holes and the package is consistent with the incoming government’s self-imposed Budget Responsibility Rules.

 

“The other big shift signalled by the incoming government relates to setting an infrastructure and investment spending focus for economic activity. The current cycle of New Zealand’s economic activity remains dominated by household and housing related spending. 

 

“The government projects residential investment spending growth to surge to over six percent in the 2019-20 June year and reach eight percent in the following year. Similarly, infrastructure and non-housing investment spending growth lifts 5.5 percent in the June 2018-19 year, followed thereafter by six percent and 5.1 percent annual growth rates.

 

“This is reinforced by the mini-Budget forecasts that indicate $41.7billion of capital spending over the coming five years, compared to a pre-election figure of $30.5billion. While $5.5billion of this increase is accounted for by extra contributions to the NZ Superannuation Fund, the planned additional $5.7billion of capital spend will be a sizable impetus to building and construction activity.

 

“This infrastructure investment and building activity are set to be the cornerstone of the growth cycle over the immediate future.  Primary risks are in the capacity of the sector to sustain this level of activity growth. 

 

“This attempted shift, away from population-based demand-driven economic growth, towards a supply-side focus for activity is undoubtedly ambitious.  As illustrated, New Zealand’s productivity debacle appears somewhat intractable – with the level of labour productivity now back to where it was 10 years earlier.

 

“Even if successful, it will take some time for such a shift to bear fruit. In the interim there will be many obstacles, as was experienced by the Key government and its ambitious plans to lift exports to 40% of GDP.”

 

Dr Nana says some economic commentators are making much of the collapse in business confidence. It is pertinent to note that the same business confidence indicator collapsed on the election of the Clark government in late-1999; and subsequently soared on the election of the Key government in late-2008, he says.

 

“And, for the record, real GDP growth averaged barely two percent per annum and just three budget surpluses over the latter period (compared to over three percent per annum and nine budget surpluses over the former period).  While we wouldn’t want to suggest that low business confidence causes high GDP growth, it is difficult not to question just what so-called business confidence indicators are indeed measuring.

 

“More sobering is the concern that some businesses could talk themselves into a funk over a change of government and threaten to muddy the prospective economic horizon.

 

“We expect the risk of a slowing in activity growth over the short term sees GDP growth for the current 2017-18 March year dip under three percent.  However, driven by the upswing in government investment, we see growth back above three percent for the 2019 and 2020 March years.

 

“We also expect the composition twist in growth to see some slowing in consumer spending growth.  However, the families’ income package is expected to bolster spending countering the confidence and wealth effects of easing house price growth.

 

“The New Zealand scene continues to be dominated by the long-standing story of high, increasing, and unsustainable private household sector debt, currently at over 167 percent of the sector’s annual disposable income,” Dr Nana says. 

 

 

BERL Birds eye view December 2017 now available.