March 27, 2019
Dr Ganesh Nana

Positive economic performance to date, but road ahead looks bumpy

Latest statistics confirm a slowing in New Zealand’s economic growth. GDP figures for the December quarter report a 2.8 percent increase in (inflation-adjusted) economic production for the 2018 year, compared to that for 2017. This rate of expansion has receded from just over 3 percent recorded earlier in the year.

Of course, these growth rates should properly be set against the increase in the population of close to 2 percent over the year. Consequently, per-capita growth remains close to 1 percent per annum, in line with that of the last couple of years.

Source: Statistics NZ

For calendar 2018, the fastest growing sectors were retail trade, accommodation, and restaurants, these being closely associated with the continued surge in tourist numbers. Noticeably, the construction sector continues to struggle, despite surging demand for new houses as well as private and public sector building and infrastructure projects.

On the expenditure side, there are encouraging signs that business investment remains robust. House building activity is up over 2.7 percent over the year, with non-residential investment spending up 4.5 percent. Similarly, consumer spending remains buoyant with growth for 2018 at over 3.3 percent (all figures adjusted for inflation).

As to the external picture, export growth was a meritorious 3 percent - especially seen in the light of a global slowdown along with ongoing trade war sabre-rattling. However, the downside of a sizable 5.6 percent increase in imports takes the edge of this economic performance. This lift in imports is, of course, consistent with the demands and requirements from business and public sector investment and infrastructure projects.

Source: Statistics NZ

Alongside these numbers are a deteriorating external accounts situation. The nation’s deficit on its external payments totalled $11bn for the 2018 calendar year, representing a shortfall the equivalent of 3.7 percent of nominal GDP or 13.8 percent of annual export revenue. This deficit has deteriorated from the $8.2bn recorded for the 2017 calendar year, which was 11 percent of annual export revenue.

Most of this imbalance is accounted for by the net outflows of funds for interest (to finance previous borrowings), as well as profits and dividends to foreign-owned businesses and enterprises. This category accounts for over $10.2bn of the annual deficit. However, the deterioration over the past year, is attributable to a worsening in the balance of trade in goods and services. The 2018 year has seen a previous annual surplus of well over $2.5bn evaporate, as the surge in goods imported outweighs the growth in tourism revenues. Interestingly, receipts from education exports (now at an annual $5.2bn) continues to grow despite earlier concerns of a negative impact from changes to immigration policy settings.

Source: Statistics NZ; BERL calculations

The OECD title their latest projections as “Global growth weakening as some risks materialise”, while the IMF point to “A weakening global expansion”. Both agencies highlight concerns around levels of activity in China and Europe in particular, as well as strained trading relationships between the US and China. Meanwhile, the elephant in the room remains BREXIT.

Notably, this month’s statement from the US Federal Reserve that effectively put a ‘hold’ on interest rate rises. Further, the ongoing decline in long-term interest rates now sees the US yield curve (i.e. long-term rates minus short-term rates) close to negative. These signals together suggest threats and risks to the global economy continue to accumulate. In this light, while New Zealand’s recent economic performance has been remarkable, prospects of considerable bumps over the near term can no longer be ignored.

It is pertinent to note that two of the main global economics agencies - the IMF and the OECD – have recently issued projections that revise downwards their expectations for 2019 and 2020.

Notably, this month’s statement from the US Federal Reserve that effectively put a ‘hold’ on interest rate rises. Further, the ongoing decline in long-term interest rates now sees the US yield curve (i.e. long-term rates minus short-term rates) close to negative. These signals together suggest threats and risks to the global economy continue to accumulate. In this light, while New Zealand’s recent economic performance has been remarkable, prospects of considerable bumps over the near term can no longer be ignored.