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Birds Eye View

Autumn 2019

Incorporating BERL Forecasts (Vol LXII No 1)

01. The Front Page

The short-term outlook has turned unambiguously uninviting as the global economy works to skirt several potential potholes.  Risks that have been accumulating over the past 2-3 years are now coming to the fore.  Notably, the Reserve Bank of New Zealand has stated for the first time that the balance of these risks are now tilted to the downside.  Alongside recent IMF and OECD assessments headlined, respectively, “A Weakening Global Expansion” and “Global Growth Weakening as Some Risks Materialise”, there is an undeniable sense of foreboding.

From the New Zealand perspective, it is clear that the majority of these risks come from offshore.  Arguably, they have their seeds in the Global Financial Crisis of the latter half of the 2000s and the anaemic recovery thereafter.  Financial uncertainty hovers as previous quantitative easing exercises are unwound, with the ever-present risk of over-valued balance sheets being adjusted southwards.  Whether it be residential property values or stock market indices, small downward moves in recent times have been followed by considerable angst and volatility as investors fear the worst.

In response, the US Federal Reserve has put its latest round of interest rates rises on hold in recognition of the now clearly fragile situation.  Late March saw the US yield curve (the difference between long-term and short-term interest rates) turn negative – foreshadowing a downturn as it did in 2005 and 2007, as investors turn to safe-haven government bonds.

Source: Federal Reserve

In addition, renewed trade disputes have compounded these risks.  The sabre-rattling between the US and China is the most prominent.  The future relationship between the UK and the EU is similarly uncertain, as the promised bounty from free trade continues to be reaped by a narrow segment of the populace.

Noticeably, and pointedly, the IMF highlights “The main shared policy priority is for countries to resolve cooperatively and quickly their trade disagreements and the resulting policy uncertainty”.  At the same time, the OECD was more succinct, “Governments should cooperated to reduce risks”.

To further muddy the waters, the power of monetary policy (interest rate changes) as a response to a prospective downturn is questionable.  Given interests rates are already low in both nominal and real terms, the ability of interest rate reductions to support activity and ward off the downturn is limited; arguably, severely so.  However, the inclination of governments to use fiscal policy (tax and spending measures) to pump prime activity may be also be limited given their current belief in the virtues of austerity of varying degrees.

Back home in Aotearoa/New Zealand, there is the relative luxury of an economy growing on the back of a strong investment surge.

Doubtless though, the construction sector is struggling to meet this demand surge. Labour and skills shortages in the construction sector have been widely canvassed and show little signs of easing. In addition, structural management constraints in the form of a questionable business model stretching thin margins and ‘race to the bottom’ contract arrangements have limited the ability of the sector to be the true lead driver of economic growth. Consequently, delays in house building and other infrastructure projects – along with now mounting cost pressures – are likely to remain.

Nevertheless, export sector performance has supported activity, with international visitor numbers continuing to increase. A range of export commodities – for example, gold kiwifruit, wine, apples, forestry, and meat – are also contributing to ongoing growth. Noticeably, education export returns continue to increase (up 12% on year), despite predictions of doom from some in light of migration policy changes. On the negative side, imports are soaring to facilitate infrastructure investment projects and the resulting external accounts are not pretty at an annual deficit of just under $11bn (or 3.7% of annual GDP).

Source: Statistics NZ

New Zealand’s economic growth is slowing, with GDP figures for the December quarter report a 2.8% average expansion for the 2018 year. This rate has receded from just over 3% recorded earlier in the year. Of course, these growth rates should properly be set against the increase in the population of close to 2% over the year. Consequently, per-capita annual growth remains close to 1%, in line with that of the last couple of years.

Employment growth remains positive at 1.3% per annum, or just under 30,000 new jobs over the past year. Unemployment is at 4.3%, or 120,000 people, with labour underutilisation at 13%. The underutilisation rate implies nearly 370,000 persons wanting to work more hours and suggests the Reserve Bank has some elbow room to move in the context of its target of ‘maximum sustainable employment’.

Source: Statistics NZ

The government accounts are in a healthy state and could be used to cushion any downturn emanating from offshore.  Much has been made of the ‘rainy day’ argument for the accumulation of a government surplus.  It seems that that rainy day may be closer than otherwise thought.  Others, though, would no doubt prefer the rainy day funds to be immediately directed towards a faster transition to the promised ‘sustainable, productive, inclusive’ economy.

Hence, the Minister’s inaugural Wellbeing Budget is likely to be announced next month against the unfortunate backdrop of a deteriorating global situation.  Indeed, the remainder of this administration’s term may not be conducive to accommodating such a transition.  The opportunity for such a transition risks being put on the ‘back burner’ yet again.

The degree to which the focus of the Budget is on the needs of a longer-term transformation of economic and social challenges will be closely watched.  Responses to climate change and future of work are set to remain tentative, while addressing the many social and community ills (child poverty and social security, housing, education, and justice) are set to swallow a large proportion of the spending limits the Minister has imposed on himself.

Of course, an option would be to modify these artificial spending rules to enable a more concerted and rapid response to these challenges while also retaining significant ‘rainy day’ putea.  However, we see this as unlikely, as it would require the Minister using up considerable political capital, which will also be required for any pursuing the Capital Gains Tax proposals from the Tax Working Group.

02. The Temperature

What you must know
New Zealand Sales Climate
New Zealand Job Climate

Fiscal and Monetary Policy

  • Wellbeing Budget will face tough task balancing the need for a ‘rainy day’ surplus and facilitating the transformation for those already drowning.
  • Monetary policy set to become even more accommodating with cuts to interest rates; but their effectiveness is now, at best, marginal.
  • Global response to slowing will depend on whether there is political appetite to ignore austerity prescriptions.
What you should know
Australia Sales Climate
United States Sales Climate
Asia Sales Climate
Europe Sales Climate
Wage Growth
Investment Plans
What we don't know yet


  • BREXIT standoff continues to paint unwelcome clouds over outlook, as little clarity on likely (or even probable) outcome.
  • US-China trade dispute sabre-rattling has a similarly unclear outcome.
  • Australian election in the balance, while relationship with China will no doubt impact on regional prospects.

Monetary policy stance

  • Lower interest rates are factored in, but impact accepted as marginal. Relationship with fiscal policy will be informative.
  • What the Monetary Policy Committee views as ‘maximum sustainable employment’ will be closely watched.

Domestic factors

  • Capacity of construction sector remains severe constraining factor. We see little easing of this constraint over forecast horizon, and impact of vocational education sector upheaval uncertain.
  • Uncertainty around proposals in the Zero Carbon Bill continue to challenge the speed of transformation for sectors and communities.
  • Impact on export sector of global slowdown also unclear.

03. People Resources

The bald facts are:

  • underutilisation (December 2018) at 12.8%; up from 12.6% a year earlier.
  • employment growth (QES December 2018 on December 2017) at 1.3%; down from 1.8% a year earlier.
  • labour force participation rate (December 2018) at 70.5%; down from 71.3% a year earlier.
  • growth in total weekly earnings (December 2018 quarter on December 2017 quarter) at 2.9%; down from 3.4% a year earlier.
  • net migration (12 months to January) at +58,391; up from +52,883 a year earlier.


Although there is little doubt that employment is rising, it is still unclear how quickly it is rising because data from the Household Labour Force Survey (HLFS) and the Quarterly Employment Survey (QES) continue to provide inconsistent messages.

The HLFS (which samples about 30,000 individuals in 15,000 households) indicated that the number of people in employment in the December 2018 quarter was 2,644,000, which was 4,000 less than during the previous quarter, but 24,500 more than a year earlier.  Meanwhile, the QES (which samples 18,000 businesses excluding agriculture and fishing and those that have no employees) indicated that the number of filled jobs the December 2018 quarter was 1,974,700 which was 23,500 more than during the previous quarter, and 25,900 more than a year earlier.  

The graph below shows that both surveys have indicated growing employment on an annual basis since March 2013, but it also illustrates the wide divergence between the HLFS and QES findings at various points in the past.  

The divergence probably doesn’t matter a great deal at the moment, because both surveys are indicating reasonable employment growth.  However, it could become a future headache for managers of the economy, if one survey shows employment growth and the other shows a decline.  This last happened in December 2012, when the QES showed annual employment growth of 1.4 percent and the HLFS showed annual employment decline of 1.7 percent.

Source: Statistics NZ

As measured by the HLFS, there were 120,300 unemployed people in the December 2018 quarter.  This was 14,800 more than during the September 2018 quarter, but almost exactly the same as in the December 2017 quarter.  The latest unemployment rate was 4.4 percent, which was up from 3.8 percent in the September 2018 quarter and unchanged from a year earlier.


The international traveller when entering or leaving New Zealand used to inform the officials of their intentions whether their travel was for a temporary or permanent change of country location.  That all changed late in 2018, and now the traveller does not state their residency intentions.  

However, Statistics New Zealand (SNZ) has set up a system to track all individuals’ movements into and out of New Zealand.   SNZ then assesses the latest 16 month period, and if the overseas travellers have been in New Zealand for 12 or more of the 16 months, they are deemed to have actually migrated to New Zealand. Whereas if the New Zealand resident has been out of New Zealand for 12 or more of the 16 months, they are deemed to have actually emigrated.

In the long run, this is a much more accurate measure because people’s intentions as to their future residency change.  Behaviour patterns of whole groups of migrants may change with sentiment as to, for example, the attractiveness of living and working in Australia relative to New Zealand.  In those cases we will in the past have had quite wide errors in measures of population size and demographics for planning capacity of health, education, housing and the markets for a wide range of goods.

The good news on recent actual flows of migrants 

In our last description of past, and forecast of future, migrant flows we described the current period of strong net inflows over the last six years of a net total of 340,000 of people with intentions of migrating into New Zealand.  In contrast, past periods with major net inflows or net outflows in the 1950s/60s, the 1980s, and 2000s each had a total net inflow of about 240,000 migrants.  

The new SNZ system of recording the actual net inflows indicates that rather than a net intentions inflow of 340,000 people over the six years to 2018, the actual net inflow on the new definition has been about 290,000 people.  (We will only know the accurate total 16 months after December 2018.)

Migrants who changed their mind

Over the five years 2013 to 2017 there were 279,000 intended net migrants, but the actual number was about 240,000.  Of the net 38,000 who revised their intentions, 69,000 more stayed more than 12 months in New Zealand than had intended, and 107,000 more stayed overseas more than 12 months than had intended to.  What this indicates again is that the previous intentions measure gave a quite inaccurate indication of the actual migrant outcomes.

Source: Statistics NZ, BERL calcs
An indicative forecast

Whereas our earlier forecasts for the net migrant inflow based upon migrants’ intentions stated at the border, was that by the end of 2019 the spot rate would be a net annual inflow of 30,000. Over the whole of calendar 2019 this would imply a net total inflow of about 40,000 people. The new system gives a lot more short-term uncertainty. However, the provisional outcome for calendar 2018 is 48,000 net inflow rather than about 58,000 stated intentions. There are also some signs that the inflows from some areas, particularly South Africa are beginning to increase.

An interim measure of the actual (or estimated) net inflow for 2018 is for a level of about 48,000, when the stated intentions for 2018 was about 58,000.

Our judgement is that when the final number is known in May 2021 for migrants in calendar 2019 according to the new SNZ definition, the net inflow will have been found to be between 50,000 and 40,000 people with the probability being higher in the range than lower.

04. Capital Resources

The bald facts are:

  • TWI NZ$ exchange rate (March average) at 74.2; down from 74.7 a year earlier.
  • Government 10-year bond rate (March average) at 2.02%; down from 2.89% a year earlier.
  • SME business overdraft rate (February average) at 9.42%; effectively unchanged from 9.41% a year earlier.
  • growth in credit to non-agriculture business (February 2019 on February 2018) at 5.5%; marginally down from 5.7% a year earlier.
  • growth in number of residential building consents (3 months to January 2019 on 3 months to January 2018) at 8.9%; up from 5.5% a year earlier.
  • growth in area of non-residential building consents (3 months to January 2019 on 3 months to January 2018) at 47.5%; up from -6.1% a year earlier.

Investment & building activity

To an economist investment has a precise meaning: the purposeful diversion of savings toward increasing the productive capacity of a business. It can take physical form in terms of procuring a new hotel or factory. It also includes inventories purchased for sale.

Statistics NZ measure investment using a measure of gross fixed capital formation. It is measured by aggregating data on the financial outlays of businesses for capital goods like buildings and machinery. Land is excluded from this measure. Change in inventories is included elsewhere in the system of accounts.

This measure is neither a leading nor lagging indicator of economic conditions. Rather it can be thought of as the “barometer” of any particular stage in the business cycle. In a boom this measure will be highly positive, in a bust it will be negative.

In the decade since the Global Financial Crisis and subsequent Great Recession of 2008 we’ve seen this gross fixed capital formation measure growing at a positive rate with some large peaks up toward 8 – 11% per annum in 2012, 2015, and 2018. Our forecast for this measure going forward is that the growth rate is likely to be positive but falling toward 2021. We note the risk of another severe drop in money supply is on the cards, likely stemming from China or Europe, which could see investment growth fall negative as more durable fixed assets are sold than are bought.

Source: Statistics NZ and BERL

Looking specifically at non-residential buildings, consents for these have been basically flat for about a decade. Consents for non-residential buildings is a decent measure of investment intentions of some businesses in New Zealand. Since it is mostly flat we might say that intentions are stable, if slightly increasing.

In terms of area rather than number we see that the total area of non-residential consents is exhibiting a strong upward movement. This could indicate plans of some businesses in New Zealand to invest heavily in large scale operations versus multiple firms investing in smaller operations. It reflects a more intensive investment strategy.

Source: Statistics NZ

In terms of how effectively such plans can be put into place, the volume of non-residential work actually put in place has been increasing up to 2017 and then appears relatively flat. It remains to be seen whether the construction sector has the capacity to deliver on the plans set in place.

Money & credit

While daily or weekly fluctuations seem to be headlined in the press, it is sobering for exporters that the NZ$ remains well above 90 Australian cents. Similarly, the NZ$ has stayed above 60 US cents over the past year.

Although our domestic growth has slowed down, the NZ$ is still an attractive option to the currency markets, with a higher yield than safe-haven assets like the Japanese Yen.

It was no surprise that the Reserve Bank left the official cash rate/OCR unchanged at a record low of 1.75 percent in March 2019. However, it is anticipated that the next review, in all likelihood, will see a cut in the official cash rate. This will be driven by the weaker global economic outlook, especially our main trading partners China, Australia and Europe, coupled with a slowdown in domestic spending.

New Zealanders are also paying back their debt, as reflected in credit card balances outstanding, with the percentage change on a year ago dropping since March 2018.

05. Home Base

The bald facts are:

  • growth in value of electronic transactions (three months to February 2019 on three months to February 2018) at 2.6%; down from 4.2% a year earlier.
  • growth in core retail sales values (December 2018 quarter on December 2017 quarter) at 4.9%; down from 6.2% a year earlier.
  • core retail price inflation (December 2018 quarter on December 2017 quarter) at -0.1%; down from +0.6% a year earlier.
  • consumer price inflation (December 2018) at 1.9% per annum; up from 1.6% a year earlier.
  • core Crown tax revenue (eight months July 2018 to February 2019) totalled $53.9bn; up 5.9% on the same period of the previous year.


Inflation in New Zealand has held at 1.9 percent for the last quarter of 2018.

Source: Statistics NZ

Tertiary education and tobacco were the big movers in prices in 2018, both driven by Government policy. The first year free for tertiary education has driven a 16 percent reduction in the cost of tertiary education. Continued increases in excise duty for tobacco have lifted their prices by nine percent. These results show a more modest effect when considered in their broad groups. 

The price level of housing and utilities has grown by 3.1 percent despite widespread reporting of rapid growth in rental prices and rates around the country. Relatively slow growth in housing costs in Auckland may be hiding this growth due to the substantial population.  

Despite the wide range of changes across the board, the 1.9 percent inflation rate falls close to middle of the Reserve Bank of New Zealand (RBNZ) target range of one to three percent. With inflation under control, the RBNZ has stated that they are expecting to hold interest rates low for a ‘considerable period’. 

The other mandate of the RBNZ, is to maintain the maximum level of sustainable employment. With economic uncertainty growing, the RBNZ has indicated any changes in the historically low official cash rate in the foreseeable future will be downwards, continuing the ongoing monetary stimulation of the New Zealand economy. 


Electronic card transactions have had a bumpy ride over the summer, with consumers cautious about spending, and new payment options changing the retail landscape.

Spending over Christmas was subdued with the total value of electronic transactions in December 2018 up less than one percent on December 2017. Growth picked up in traditionally slow January, with the total value almost four percent higher than for January 2017. 

Spending on services and hospitality saw the highest growth, this was countered by falls in apparel and especially fuel.  Growth in spending on services and hospitality is in line with growth in tourism activity.

Source: Statistics NZ

Reductions in spending on fuel reflects the fall in petrol prices since the peak reached in October 2018. Apparel saw the usual boost over the summer months, but values were lower than last summer.

Paymark, our largest electronic transaction processor reported a slow end to 2018 across their network of merchants. Growth picked up again in the New Year, reaching levels close to their average annual growth rate of the past five years.

Total numbers of transactions continues to grow, but ever more slowly as was discussed in our summer edition. The actual total of all kinds of consumer transactions is unlikely to be slowing, especially as our population increases. Rather it is more likely that other payment methods such as short term finance are increasingly popular. 2018 saw rapid growth of this kind of consumer finance and stores as diverse as stationery, cosmetics and children’s clothing are offering this payment option to their customers, often by way of a smartphone app.

Source: RBNZ

Meanwhile the growth of outstanding credit card balances reached a peak in April 2018 and has been declining since, further suggesting that consumer finance arranged at the shop counter is being widely adopted in place of traditional credit cards, or that discretionary funds are going to paying off debt.

Government accounts

The New Zealand Government’s financial statements for the eight months ended 28 February 2019 were largely in line with the with the Half Yearly Economic and Fiscal Update (HYEFU) forecasts published in December 2018.

The operating balance before gains and losses (OBEGAL) for the eight months to February 2019 was a surplus of $2.2 billion. This was $0.3 billion higher than forecast. 

Lower than expected core crown expenses drove this OBEGAL surplus. Core crown expenses were $0.7 billion (1.3 percent) below forecast. Treasury reported that this was this was driven by education expenses being $0.2 billion less than forecast because of demand driven factors. Other factors that contributed to expenses being less than forecast include social assistance benefits and impairments of sovereign receivables also being $0.2 billion below the HYEFU forecast.

The lower expenses were partially offset by Core Crown tax revenue of $53.9 billion being $0.1 billion (0.3 percent) below forecast. This lower than expected revenue figure was driven by corporate tax receipts being $0.4 billion below forecast. This was mainly due to below-forecast provisional tax estimates and assessments. The impact of the reduced tax revenue was limited by customs and excise duties being $0.2 billion higher than forecast.

These slight variances are to be expected as fluctuations occur month to month as accounting recognition of revenue and expenses vary. The results do not necessarily indicate a deviation from the full year expected results. 

Compared to February 2018 core crown tax revenue increased by $3.0 billion, while core Crown expenses grew by $3.9 billion. This result is the primary reason why OBEGAL is lower than last year when the OBEGAL surplus was $2.9 billion in February. 

BERL is forecasting that OBEGAL surpluses for the year ended June will continue until 2022 and will between $4.5 billion and $4.7 billion in these years.

Source: Govt Financial Statements

Gross debt was $89 billion in February 2019. This was $0.4 billion lower than forecast at $89.5 billion although it is higher than gross debt in February 2018 of $86.3 billion. Gross debt in February 2019 is equal to 30.5 percent of GDP compared to 30.6 percent in February 2018 and a HYEFU forecast of 30.7 percent. Gross debt was lower than the HYEFU forecast due to repurchase of government bonds that were due to mature in March that was not forecast. 

Net debt of $59.9 billion is largely in line with HYEFU forecasts and the previous year. As GDP has increased since February 2018 net debt as a percentage of GDP has fallen from 21.2 percent to 20.4 percent. The HYEFU had forecast net debt to GDP to be slightly higher at 20.5 percent.

When the  accounts were released Minister of Finance, Grant Robertson, stated that “the Government’s financial position remains strong in the face of a global downturn” and that “the Government will continue to keep a careful watch on spending, while making the important investments in our economy and society.”

06. Abroad and Beyond

The bald facts are:

  • growth in merchandise export receipts (3 months to February 2019 on 3 months to February 2018) at 1.5%; down from 15.1% a year earlier.
  • growth in merchandise import payments (3 months to February 2019 on 3 months to February 2018) at 9.0%; down from 11.5% a year earlier.
  • growth in international tourist spending (3 months to January 2019 on 3 months to January 2018) at 4.4%; down from 9.8% a year earlier.
  • growth in India GDP (December 2018 quarter on December 2017 quarter) at 6.6%; down from 7.0% a year earlier.
  • growth in China GDP (December 2018 quarter on December 2017 quarter) at 6.4%; down from 6.8% a year earlier.
  • growth in Australia GDP (December 2018 quarter on December 2017 quarter) at 2.3%; similar to 2.4% a year earlier.

Exports, including tourism

Services exports

In the middle of 2018, it looked like the growth in tourism had stalled. However, the numbers picked up again towards the end of the year and at the beginning of 2019, at least as far as the number of international visitor arrivals is concerned.

In the 12 months to January 2019, the number of visitor arrivals in New Zealand was 3,883,335. This was 4.1 percent more than during the 12 months to January 2018. By comparison, in the 12 months to January 2019, the number of nights international visitors spent in commercial accommodation was just 1.5 percent more than during the 12 months to January 2018.

The data on spending by international visitors paints a similar picture to the data on international visitor arrivals, with little or no growth in the middle of 2018, followed by a recovery later in the year.

Source: Hīkina Whakatutuki

The spending by international visitors represents export earnings for New Zealand; and, to put this into perspective, exports from international tourism in 2018 were $11.6 billion, which compares to dairy exports of $14.2 billion and meat exports of $7.4 billion.

Goods (merchandise) exports

Goods export revenues have exhibited strong growth over the past year, continuing a trend of strong growth that has been occurring since February 2017. Much of the $3.1bn growth on the previous year ($55.6bn in total for the year) comes from soaring meat, kiwifruit, infant formula, and forest receipts, along with the continued recovery in dairy export revenue.

Source: Statistics NZ

In addition to the larger export items, there has been strong growth in a number of our smaller export industries, namely apples (with $0.7bn in export revenue), fish and wine (both $1.7bn each), and aluminium ($1.2bn).

Dairy export receipts have increased to an annual figure of $14.6b in export earnings, thanks to increases in export volumes and prices. A downward trend in Global Dairy Trade (GDT) prices has started to impact on export prices, but with volumes increasing, total export receipts will continue to rise. The question is with the recent decline in export prices how much further will dairy export receipts rise.

The meat industry has seen surges in both volume and export prices over the last year. The average price per kg has moved from $7.60 to $8.00 over the last year. This combined with an increase in export volumes of 36,000 tonnes, has export receipts for meat hitting $7.4bn for the year.

In contrast, the forestry industry export returns have increased due to volume increases, as prices have remained static. Annual exports are now $4.7bn up 14% on the previous year.

Source: Statistics NZ

Kiwifruit annual export receipts are now worth $2.2bn for the current year, up 33% on the previous year. The March to November export season for kiwifruit in 2018 was a bumper period, with the surge in export receipts coming from both volume and export price increases. The average price per kg is sitting at $4.06, while export volumes hit 540,000 tonnes for the year, up 84,000 tonnes on the previous year. Much of the increase in volume and price is being driven by increases in the gold kiwifruit variety, with gold kiwifruit now making up 55% of kiwifruit exports.

Over the last four year the export value of food preparations for infants ready for retail sale has climbed rapidly, going from $360m in 2015 to $1.4bn in the latest year. The export value of this food has increased by just over $300m in the latest year alone. The rapid increase in the value of this category reflects the shifts in exports to infant milk formula ready for retail sale, as opposed to bulk commodity powder exports.

Looking ahead, the continuing inactivity towards ending trade disputes between the US and China and the EU (not to mention BREXIT) will take the gloss off 2019 exports earning. In contrast, the ratification of the CPTPP and the trade agreement subsequently coming into force on 30 December 2018, may enable some export revenues to grow even with reduced demand coming from some of our largest trading partners.

Trade & payments balances

Despite robust growth in goods export receipts, the annual merchandise trade balance has continued to deteriorate. From a $2.9bn deficit last December, the balance is now $6.2bn in the red.

Source: Statistics NZ

This continued decline in our merchandise trade balance has been caused by on-going double-digit growth in New Zealand’s annual import bill.  For the latest year the value of our imports rose by 12.3% compared to the previous year, while at the same time our export receipts grew by 6.8%.  In particular a 40% increase in our annual crude oil import bill has seen it rise to $4.3bn.  Further, plant and machinery imports also registered double-digit growth over the last year, reflecting continued investment in both the public and private sector infrastructure.

In contrast, trade in services (including education and tourism export revenue) remains in solid surplus.  This is based on data for the year to December which saw our trade in services surplus close at $4.8bn.

Looking ahead, promising growth in meat, kiwifruit, forestry and dairy revenues are unlikely to stop a further worsening of this external deficit.  

Flat tourism growth over the last year, with little growth forecast for the next year will not help balance this shift.  However, the primary drivers will be oil prices and the imports required to feed the heightened infrastructure renewal and investment programs in health, education and housing.

The largest uncertainty to this outlook for 2019 is the trade relations between the US and China.  There appears to have been little progress to date in improving that relationship and ending the current imposition of retaliatory tariffs. Then there is the uncertainty around the future relationship between the UK and the EU, and the nature of the UK’s exit from the EU.

For 2019 the risks are clearly on the downside, rather than opportunities on the upside.

The world

How has BREXIT affected the UK economy?

As the UK government continues to debate BREXIT options (with the latest extended deadline of April 12 drawing ever closer with no sign of the political deadlock abating) the UK economy is holding up. GDP growth was 0.5 percent in January reversing a drop of 0.4 percent in December 2018.

Employment has reached the highest levels since 1975, with unemployment levels at just 3.9 percent in January 2019 and employers ramping up hiring despite the prospect of no deal. Average earnings annual growth was 3.4 percent in the three months to January, the highest rate in over 10 years. Annual growth in average pay remained at 3.4%, the fastest rate in a decade.

Source: Eurostat

However, analysts suggest this growth is a red herring and the increase in firms hiring workers masks a reticence to commit to investing in expansion, technology and equipment. A sustained reluctance by businesses to invest could have a detrimental impact on the UK economy in the long term. Investment groups have also signalled the ongoing uncertainty is putting investment plans at risk.

Consumer spending remains high as retail sales volumes rose by 0.4 percent in February compared to January. Yet supermarket sales fell, with food stores recording the biggest dip in sales for two years as January sales ended.

UK’s trade in goods deficit widened as imports grew faster than exports in January 2019, a similar picture to New Zealand. The deficit grew to £13.1bn, against expectations of a £12.2bn gap. There is speculation that UK manufacturers are stockpiling components to cushion the impact of a sudden no deal BREXIT.

A slowdown in the global economy

A no-deal or hard BREXIT also has implications for the Eurozone. Italy is in a recession, inflation is weak and below target, wage growth is subdued, and yields on German ten-year government bonds fell below zero in March, for the first time since 2016.

Global trade growth has slowed overall, and trade restrictions are weighing on expansion and investment. In March, the IMF signalled weakening global expansion and stated risks to global growth were tilting to the downside. The OECD also identified global growth was flagging, and slow growth in both Europe and China could derail the global economy. Europe relies on Asian markets, and China’s reduction in demand for European goods is having an impact. 

China has avoided a recession for decades through credit-based economic stabilisation policies, where credit policies are eased and bank loans increase when the economy looks weak and credit is restrained in times of plenty. Still, there are signs of a current slowdown – foreign sales in China are falling, factory activity, prices and profits are down, and tax revenue is declining. Uncertainty over trade could be a factor, and China could rebound if the resumed US and China trade talks in early April are constructive. It is imperative that governments globally seek greater cooperation on trade to reduce risks.

Is the US yield curve indicating a looming recession?

On March 22, the US Treasury yield curve inverted for the first time since 2007, and some pundits consider this a market signal of a recession within the next 18 months. Some have also downplayed the predictive influence of the curve saying the timing lacks precision. However, it has inverted before every recession in the past 50 years, including three times between late 2005 and 2007, predicting recessions during that time. It has only offered a false signal once.

Source: Bureau of Economic Analysis

US GDP growth was at 2.9 percent at December 2018, with inflation holding steady at 1.9 percent, bolstered by tax plans boosting growth 2018. Yet, household spending continued declining, tumbling 0.5 percent, the biggest drop in nine years. Motor vehicles and recreational goods were the biggest areas of reduction.


Australia’s housing market continues to be a source of vulnerability and concern for the economy. House prices in Melbourne and Sydney fell 1 percent in February, with annual declines at 10.4 percent and 9.1 percent respectively. Prices in Darwin and Perth are also falling, with Hobart the only major city to see gains (0.8 percent). Analysts suggest there is more to come with prices expected to continue to decline into 2020.

The housing downturn, along with slow growth in China, Australia’s largest trading partner, contributed to lower than expected growth. GDP grew 2.3 percent in the year to December 2018, continuing to decline from 2.8 percent in September 2018.

Source: Australian Bureau of Statistics

Tax cuts were announced in the Australian government’s 2019 Budget, with low- and middle income earners benefiting the most, although Australia still has one of the highest tax rates in the OECD. Small business also benefit from tax relief with planned reduced rates for companies with less than A$50m turnover being fast-tracked, and instant asset tax write-offs for equipment under A$30,000. 

The Budget also promised infrastructure investment of A$100 billion over 10 years on rail and road projects, including an A$2 billion fast rail connection between Geelong and Melbourne. Rural and regional areas received a boost with A$6.3 billion in assistance and concessional loans for drought-affected farmers.


A backdrop to the current situation are a couple of potentially significant elections scheduled to take place.

India, the world’s most populous democracy is just commencing a 4-week election.  Prospects for the return of PM Modi are finely balanced, with growth in economic activity, having just slipped under 7%.  Growth underpinned by strong infrastructure investment spending has assisted many, but the plight of the rural poor continues to be dependent on seasonal weather patterns and the onset of the monsoon.  As always, the outcome will be a coalition government made up of several regional parties.  However, if he does manage to return, the power of PM Modi to continue his reform programmes will likely be reduced.  Nevertheless the outward looking trade agenda for the Indian economy is unlikely to be rolled back.

Federal elections are imminent for Australia, probably in May.  While analysts highlight the unpopularity of the current government, it is not clear that the election will lead to a decisive change.  Without doubt, relations with China will be an immediate focus for any incoming government in Australia.

07. Forecast Data Tables

2015 2016 2017 2018 2019 2020 2021 2022
Actual Actual Actual Actual Estimate Forecast Forecast Forecast
annual average % change, March years
GDP (expenditure measure) 3.5 4.2 3.7 2.7 2.8 2.6 2.6 3.0
GDP (production measure) 3.7 3.6 3.7 3.1 2.7 2.6 2.6 3.0
Private consumption 3.0 3.8 5.8 4.0 3.5 2.9 2.5 2.6
Government consumption 3.3 2.3 2.1 2.8 2.2 2.1 2.0 2.2
Housing investment 8.2 7.1 8.5 1.0 3.4 5.1 2.8 3.2
Business investment 7.8 2.6 1.4 6.5 2.0 3.4 3.5 3.9
Exports 4.6 6.1 1.4 2.9 2.8 1.5 1.7 2.1
Imports 7.5 2.3 5.1 7.1 3.7 1.3 1.8 1.6
June quarters
Employment (QES annual % change) 1.9 3.1 3.0 1.2 1.9 1.9 1.8 1.8
Unemployment (% of labour force) 5.5 5.0 4.7 4.4 4.4 4.2 3.9 3.8
Net migration (annual 000s) 58.3 69.1 72.3 65.0 52.5 48.5 44.5 42.5
annual % change, March quarters
GDP deflator (average annual % change) 0.6 0.7 2.4 2.9 1.6 2.4 2.3 2.0
Wages (avge hourly earnings) 2.1 2.4 1.5 3.5 3.4 3.3 3.4 3.5
Consumer prices (CPI) 0.3 0.4 2.2 1.1 2.0 1.8 1.9 2.1
Producer prices (PPI outputs) -2.5 0.1 4.1 3.5 3.3 2.6 2.7 2.8
June years
Current account balance ($bn) -8.2 -5.8 -7.1 -9.5 -10.2 -10.7 -11.5 -12.4
Current account balance (% of GDP) -3.4 -2.3 -2.6 -3.3 -3.4 -3.4 -3.6 -3.9
Net international investment position (% of GDP) -60.7 -62.9 -56.7 -53.5 -54.6 -55.4 -56.2 -57.1
Government OBEGAL ($bn) 0.7 2.3 4.4 6.0 4.9 5.0 5.0 4.9
Government OBEGAL (% of GDP) 0.3 0.9 1.6 2.1 1.6 1.6 1.6 1.6
average levels, March quarters
Exchange rate (TWI) 77.9 72.2 78.0 74.9 74.0 71.9 71.9 71.9
90-day bank bill rate 3.6 2.6 2.0 1.9 1.9 1.7 1.7 1.9
10-year bond rate 3.3 3.1 3.3 2.9 2.2 1.9 2.1 2.2
Memo items
Merchandise export receipts (fob $m, June years) 45,987 46,723 47,653 53,062 55,337 56,912 58,374 59,667
Merchandise import payments (cif $m, June years) 48,815 50,075 51,131 57,094 60,851 63,186 65,448 67,582
International visitor arrivals (000s, March years) 2,948 3,255 3,544 3,820 3,912 4,058 4,216 4,380
Residential new building consents (000s, March years) 25.0 27.8 30.6 31.4 33.0 34.2 35.0 36.2
New car registrations (000s, March years) 227.6 239.8 259.4 272.0 252.3 251.2 255.2 259.0
Core retail sales nominal (annual % chge, March years) 5.1 5.4 6.2 5.7 4.9 4.8 4.7 4.7
Labour market indicators
2015 2016 2017 2018 2019 2020 2021 2022
Actual Actual Actual Actual Estimate Forecast Forecast Forecast
June quarter
Full-time employment (000s) 1,823 1,927 1,989 2,075 2,115 2,156 2,196 2,236
Part-time employment (000s) 526 527 542 548 557 566 575 583
Total QES employment (000s) 1,825 1,881 1,938 1,961 1,998 2,037 2,073 2,110
FTE employment growth (annual % change) 1.9 3.1 3.0 1.2 1.9 1.9 1.8 1.8
Unemployment (000s) 133 126 123 121 120 116 108 111
Official unemployment rate (% of labour force) 5.5 5.0 4.7 4.4 4.4 4.2 3.9 3.8
Labour force (000s) 2,482 2,581 2,654 2,744 2,793 2,838 2,879 2,920
Participation rate (% of labour force) 68.6 69.5 69.8 70.6 70.5 70.4 70.2 70.1
Not in labour force (000s) 1,134 1,134 1,149 1,141 1,168 1,195 1,222 1,245
Working age population (000s) 3,616 3,715 3,803 3,885 3,961 4,033 4,101 4,165
Migration (annual year to June)
Gross inflow (000s) 115,655 125,055 131,355 129,536 125,000 127,500 124,500 126,000
Gross outflow (000s) 57,396 55,965 59,050 64,541 72,500 79,000 80,000 83,500
Net inflow (000s) 58,259 69,090 72,305 64,995 52,500 48,500 44,500 42,500
Merchandise export receipts
2015 2016 2017 2018 2019 2020 2021 2022
Actual Actual Actual Actual Estimate Forecast Forecast Forecast
annual $m, June years
Dairy 12,035 11,160 12,502 14,137 14,590 14,925 15,224 15,528
Meat 6,542 6,769 6,238 7,276 7,640 7,854 8,027 8,107
Wool 806 761 524 544 546 546 546 546
Fish 1,492 1,695 1,676 1,708 1,753 1,781 1,808 1,835
Horticulture 2,700 3,356 3,430 3,613 3,992 4,136 4,272 4,400
Alcohol 1,485 1,638 1,735 1,776 1,828 1,890 1,951 2,014
Forestry products 4,683 5,155 5,493 6,403 6,774 7,086 7,404 7,738
Aluminium 1,022 923 956 1,124 1,152 1,157 1,163 1,169
Machinery & transport eqpmt 2,428 2,481 2,450 2,564 2,680 2,755 2,826 2,883
Petroleum 1,186 671 713 631 631 632 634 638
Other 11,609 12,114 11,936 13,287 13,752 14,151 14,519 14,809
Exports of Goods (fob) 45,987 46,723 47,653 53,062 55,337 56,912 58,374 59,667
% change -6.3 1.6 2.0 11.4 4.3 2.8 2.6 2.2
as a % of GDP 18.8 18.2 17.4 18.4 18.4 18.0 17.6 17.1
Balance of Payments on Current Account
2015 2016 2017 2018 2019 2020 2021 2022
Actual Actual Actual Actual Estimate Forecast Forecast Forecast
annual $m, June years
OT trade balance (fob-cif) -2,828 -3,352 -3,478 -4,031 -5,514 -6,274 -7,074 -7,915
BoP conceptual adjustments 1,400 973 668 496 1,119 1,400 1,400 1,400
BoP merchandise trade balance -1,428 -2,379 -2,810 -3,535 -4,395 -4,874 -5,674 -6,515
Services exports 19,612 22,222 22,818 24,356 25,348 26,058 26,787 27,538
Services imports 16,346 17,197 17,743 19,044 20,375 20,869 21,375 21,894
Services balance 3,266 5,026 5,075 5,314 4,972 5,189 5,412 5,644
Balance on goods and services 1,838 2,647 2,265 1,779 577 315 -262 -871
Investment income balance -9,633 -8,235 -8,851 -11,055 -10,370 -10,686 -10,926 -11,171
Transfers balance -443 -258 -531 -273 -316 -316 -316 -316
Current Account Balance -8,236 -5,847 -7,117 -9,548 -10,211 -10,688 -11,504 -12,358
as a % of GDP -3.4 -2.3 -2.6 -3.3 -3.4 -3.4 -3.6 -3.9
Government accounts
2015 2016 2017 2018 2019 2020 2021 2022
Actual Actual Actual Actual Estimate Forecast Forecast Forecast
annual $m, June years
Direct taxation 42,745 44,915 48,755 51,775 54,060 56,830 59,670 62,655
Indirect taxation 23,890 25,530 26,890 28,450 29,705 31,225 32,785 34,425
Miscellaneous revenue 5,575 5,675 6,140 6,555 6,650 6,750 6,855 6,955
Core crown revenue 72,210 76,120 81,785 86,780 90,415 94,805 99,310 104,035
as a % of GDP 29.5 29.6 29.9 30.0 30.0 29.9 31.4 32.9
Social security 23,525 24,080 25,295 26,000 27,950 29,765 31,700 33,760
Health 15,060 15,625 16,225 17,160 18,445 19,555 20,725 21,970
Education 12,880 13,160 13,280 13,630 14,380 15,025 15,700 16,410
General expenditure 17,120 17,475 18,005 20,290 20,900 21,530 22,175 22,840
Debt servicing 3,785 3,590 3,535 3,495 3,565 3,655 3,750 3,840
Core crown expenditure 72,370 73,930 76,340 80,575 85,240 89,530 94,050 98,820
as a % of GDP 29.6 28.7 27.9 27.9 28.3 28.3 29.7 31.2
Memo items
Total crown OBEGAL 745 2,280 4,415 5,960 4,920 5,010 4,985 4,925
as a % of GDP 0.3 0.9 1.6 2.1 1.6 1.6 1.6 1.6