1. Kim Mundy – ASB Economist August 2017
NZ economic overview
Kim Mundy – ASB Economist
August 2017

2. Disclaimer
This document is a private communication and is not intended for public circulation or for the use of any third party, without the approval of ASB. The information contained in this document is given with an express disclaimer of responsibility. No right of action shall arise against ASB or its employees either directly or indirectly as a result of this information. Those acting upon this information do so entirely at their own risk. This information does not purport to make any recommendation upon which you may reasonably rely without taking further and more specific advice.

3. Topics Global outlook, key export sectors Housing, construction
NZ economic growth overview
Inflation, interest rates and NZD

4. Global picture

5. Potential NZ impact from Trump victory
The USA is the destination of 12% of New Zealand’s exports (4th behind Australia, China and the EU).
US growth (spurred by income tax cuts and greater government spending) could boost NZ export demand.
But potential for trade protection to impact on NZ’s key trading partners.
Inflationary policies in the US could push the US Federal Reserve to lift interest rates faster than expected; could boost USD.
Overall impacts appear muted vs. campaign rhetoric.

6. Financial market impact of Trump victory
Stocks continue to rise on fiscal stimulus outlook.
The lack of detail saw a slowdown in gains in March, but since lifted again.
Now the lack of any action is supporting equity markets through expectations interest rate increases won’t be as fast.

7. Upward pressure on bond yields waning
Initially, Trump’s economic policies considered to be inflationary.
And US economic development late 2016 / early 2017 pushed the Fed to hike.
NZ yields were dragged higher, same in many other countries.
But yields lower again on Trump timing and weak US inflation data – questions over future US Fed rate hikes.

8. Brexit

9. Brexit update
UK Government triggered Article 50 on March 29, sparking 2 years of trade talks.
UK June general election outcome has thrown exit negotiation strategy into disarray: ‘hard’ vs. ‘soft’.
Economy starting to deteriorate.
Real wage gains effectively flat from February, higher inflation eroding purchasing power.
Potential NZ impacts concentrated in tourism, meat, wine – slower UK growth, higher NZD/GBP.

10. Broad global outlook

11. Milk price recovery

12. Milk price forecast
$6.15/kg for season just ended, in line with our long-held forecast.
Optimistic about the new season: forecasting $6.75/kg for 2017/18.
Long-term outlook remains positive.

13. Tourism booming Tourism numbers and spend have lifted strongly.
Source of arrivals remains broad, limiting risk of a downturn.
Accommodation capacity constraints could act as a brake to growth.

14. Non-dairy exports doing well
Tourism, wine and fruit all remain strong performers.
2016 compared to 2015:
Total export values
$0.5bn (1%)
Tourism-related
$0.9bn (6%)
Other exports combined
$0.3bn (1%)

15. Housing, construction

16. Strong population growth through migration
Net migration at record highs.
Fall in permanent departures while Australian job opportunities are muted.
Increased permanent arrivals, returning NZer’s from Australia and skill shortages attracting foreign labour.
Students (Indian and Chinese) declining, replaced by work visa entrants.
Moderation expected, as Aust. outlook eventually improves

17. New housing restrictions

18. Past housing restrictions
First LVR restrictions (2013) slowed house sales for over 6 months.
2015 investor restrictions: spike in Akld sales over July-August Sharp drop in October & November. Impact wore off after ~5 months.
2016 restrictions still weighing on market activity.

19. Housing supply shortfall persistent
Cumulative shortfall 2006 – 2016 approx 29,000 houses
By 2020 approx 40,000.

20. Regional house listings, sales

21. Housing market
House price growth started to slow in Auckland from mid- 2016, slight falls in near term.
Most regions seeing price growth slow since lending restrictions.
Flat/falling Auckland prices in 2017H1.
Momentum to ease nationwide.

22. Building outlook

23. General outlook

24. The NZ labour market

25. Low wage environment

26. Consumer spending reasonable
Consumer spending growth supporting overall growth.
Low inflation relative to wages boosting disposable income.
Strong population growth adding to momentum still in near term.

27. As is consumer confidence

28. Business confidence volatile but respectable

29. Growth moderated in 2015, back up in 2016-18
Low interest rates still supporting growth.
Dairy recovery boost to come.
Population and income growth to remain key supports of NZ economy.
Election: the usual period of uncertainty.

30. Inflation, financial markets

31. Inflation: now back above 1%

33. Interest rates low for a long time
The OCR is comfortably on hold now. High threshold for further cuts.
Market pricing of OCR hikes partly reflects impact of sudden change in global outlook generated by Trump.
We estimate that market pricing will continue softening over time.

34. NZD forecasts

35. Summary International events likely to have a big influence on 2017.
However, the impact remains largely uncertain for now.
NZ economy growth to pick up to 3.5% growth over
…supported by migration flows, construction, low interest rates, real wage growth, tourism and dairy recovery.
2017 house prices flat/down in Auckland, flattening elsewhere.
Key risks: Trump; Brexit fallout; higher NZD.
Inflation expected to remain around 1-2%, but downside risks remain.
The RBNZ is expected to hold the OCR at 1.75% for the foreseeable future. Market slightly ahead of itself.