NZIER expects solid outlook, but with increasing downside risks - Quarterly Predictions, September 2018

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NZIER Quarterly Predictions, September 2018 - The New Zealand economic outlook remains reasonably solid but there are increasing downside risks, as detailed in the latest NZIER Quarterly Predictions.

“Although growth is expected to moderate on the back of a continued slowing in population growth, we forecast annual GDP growth to average just under 3 percent over the next five years – still a respectable outcome.”

“However, businesses are feeling increasingly pessimistic about the economy, with deteriorating profitability a concern for many”, said Principal Economist Christina Leung.Increasing downside risks

Strong population growth in recent years should continue to underpin demand across a range of sectors, particularly construction. However, there are downside risks to the growth outlook, stemming from heightened uncertainty both here in New Zealand and abroad.

Domestically, businesses are feeling more downbeat about the economy. Costs are rising, and with businesses finding it difficult to pass these on to customers in the form of higher prices this is impacting negatively on profitability. The recent announcement by Fonterra of a downward revision to its payout and dividend will also dampen confidence in the rural sector.Uncertainty in the construction sector from capacity constraints

Although residential and non-residential construction demand remains strong, capacity constraints limit the extent to which construction activity can ramp up. Extremely tight margins in the construction sector have seen major construction firms exit the industry, raising questions about who will lead the construction of large-scale developments. We expect a more protracted construction cycle as a result.We now expect an OCR increase in first half of 2020

“The continued tightening of monetary policy by the US Federal Reserve is leading the tightening of monetary conditions globally. However, the Reserve Bank remains cautious about tightening too soon, and has indicated it will leave the OCR on hold for longer with the potential for interest rates to move lower. In light of this, we have pushed back our expectations for when the OCR will increase to the first half of 2020.”

An independent take on the New Zealand economic outlook is available exclusively to NZIER’s members in the latest Quarterly Predictions.