By Gareth Kiernan*
If you’ve gone to the fridge and taken a swig of milk from the bottle lately, you will have noticed it’s got lumps in it – which is hardly surprising when you look at the “best before” date.
Prospects for the dairy payout and GDP growth looked pretty tasty back in February, but things have soured markedly throughout the course of this year.
Plunging dairy prices will have significantly reduced farmers’ appetite for spending, and there will be a number of highly leveraged operators who will be feeling nauseous about the payout possibly dropping below $5/kgms.
The lid will be kept on economic growth in many provincial areas due to the dairy sector’s struggles, although soaring meat prices will mitigate the negative effects in some regions.
Elsewhere in the kitchen, the construction sector is coming to the boil across Auckland and Canterbury.
This activity has contributed to a record influx of migrants looking for their next meal ticket.
More building work and above-average population growth will be key factors helping to keep nationwide economic growth above 3.0% pa until early 2017.
The lower outlook for dairy prices and GDP growth means that fewer interest rate rises are on the menu over the next couple of years. Recent data shows that inflationary pressures have been kept on ice so far, despite the strong performance by the economy and tightening labour market over the last 18 months.
We now expect the official cash rate to be at just 4.0% by the end of 2015 and 4.5% by the end of 2016.
This combination of factors has also taken the heat out of the New Zealand dollar.
We expect the TWI to fall by 18% over the two years to September 2016 as international investors enjoy improving relative returns elsewhere, such as in the US.
A side dish accompanying the lower exchange rate will be higher tradable prices – so even though domestic price pressures will be less intense than we had previously expected, inflation is still set to top 3.0% pa during 2016. More expensive imported goods will make it more costly for consumers to satiate themselves and cramp growth in the volume of household spending, which will slow from 3.2% pa in June 2015 to 1.9% pa by March 2017.
The government was hoping to dine out on a return to surplus in the current fiscal year.
Although we are still forecasting this outcome to occur, the target is in jeopardy due to the risks of reduced growth in the tax take.
Nevertheless, the recipe for government policy over the next three years is mostly more of what we’ve been fed over the last six years – spending restraint, with a focus on populist “problem” areas such as child poverty, housing affordability, and the Resource Management Act.
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This piece is a light-hearted overview of Infometrics latest economic forecasts. The full forecasts are available to subscribers at Infometrics.co.nz.
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Gareth Kiernan is the managing director at Infometrics, an economic consultancy and forecasting service, and he manages the forecasting team. You can contact him here »
14 Comments
An 18% drop in the exchange rate? I hope you end up being correct, as that would certainly help rebalance things towards the tradable sector, as your chart suggests, with export receipts growing to records by 2016. Will the single target, limited tools Reserve Bank Act get in the way of that outcome?
So what state are many other OECD Nations in? what are they selling? debt or financial instruments of mass destruction.
We may have a primary export sector in agriculture but provided we dont damage the soil and environment doing it, it will last for ever as a producer.
regards
No offence meant. If you go through the list of OECD countries, you probably find some other agrarian socities with an implanted housing bubble, true. Portugal or Greece, for example.
I think that NZ could have used the spoils of the past relatively good two decades to build up something more than cows n houses. Instead the same hut that cost 50K twenty years ago in some shitty burb goes now for a multiple of that - only that it is twenty years older. Sure, it made a lot of punters rich, but society as a whole poorer and ill positioned for the future.
Never mind. The status quo is of course also ok. It is still attracting many thousands of immigrants per year, mainly from 3rd world countries, as we know. Good luck to us.
Oh I wasnt taking offence. Just when I hear we need to do something else besides agriculture and have been hearing that since HC's(?) time and yet it is still profitable for NZ I just have to ponder. I mean "we have to move to something else" yet not much has come of this. IT? well india are as good and hugely cheaper, 10 years ago EDS NZ had some of its customers doing large projects via India rather than via NZ programmers. That is also a numbers game as well as cost mind you.
Housing, well yes I agree, it is a bubble and it will pop and badly....50%+ losses IMHO...it is going to be ugly.
"but society as a whole poorer and ill positioned for the future." totally agree.
"many thousands of immigrants" and that makes us poorer per capita, really stupid.
regards
The final bill will be presented, that is for sure. But as the old Communist countries have shown, economic mismanagement can last for decades before it finally collapses. So nobody of us can answer the million dollar question of when it is going to pop.
Software ... I think India is vastly overrated. I lived there myself and comptency levels are mostly shocking. NZer are not the least creative bunch in the world, and that is what it is all about: ideas. Why should only always the US come up with good virtual business models.
Maybe you are right, but I would still like to see the govt take a few billion dollars in its hands and build up a software industry. If it fails, then it is still better spent than on dole or some bs war in the Middle East, and if it works that NZ would be so much better placed.
If you stay with agro business, tourism, houses I feel that NZ will go the way of Argentina. Once a prosperous country, today a sad loser.
I'd love to do something else. But I ended up in housing and dairy because those were the only two that had real world profits (not payment for some employees or just hand-to-mouth stuff for most). Might be different in auckland. probably is different for those who have families/family members paying for stuff and helping out, or have solid jobs or near freehold accomodation
Most good NZ software start-ups get bought out by overseas companies before they even develop their own identities and could convince onshore investors like you to bet on the industry.
That is why I think the govt should give it a try. If it fails it is a very honorable fail. But not even trying seems unfair to the country and especially its youth. Wellington btw, has probably the most vibrant start-up scene in NZ. Not sure why. Maybe because young people there do not have to pay such horrendous amounts for houses but have some left over to implement their business ideas.
The free market as is, will probably never be able to come up with anything signficant, true. But remember Airbus or even the Chinese "economic miracle": they would not have gotten anywhere without initial govt protection.
I know that this will not happen, and definitely not with a Key govt (they stick with proven stuff only), and not with a Labor-led govt as they will shell out for hand-outs not investments. But it would be worth a try. I remember Bernard Hickey advocating something like this years ago. Of course nobody listened ...
So the answer must be eternal near-zero interest rates plus money printing. We have finally found the holy grail of economics ensuring happiness and prosperity all around.
C'mon ... the RBA is the only (OECD haha) central bank, that shows any sense. The economy needs innovation and entrepreneurship, not cheap credit.
You think so? The bit of interest rate delta attracts a lot of funds into NZ and that in turn has rebubbled real estate and that in turn has spread the all-is-good feeling that makes people borrow and spend.
NZ is not in a crisis mode, so why should it print money or manipulate interest rates? Only because basket case economies like the PIGS and some others do it?
I dunno. I usually think politicians are full of shite, but in NZ they seem to at least have remainders of common sense.
Peter Pen , In my view you are wrong about the cows and houses ........NZ is much, much more and we should be proud of our achievements .
We pick stuff that few others do really well at , and we become the best or as close as dammit , from Rugby to milking cows we are the best in the world
We are a tiny economy in the OECD , with just 4,5 million people , so we are the size of a medium sized OECD city .
So we need to view our economy ir the context of the economy of an OECD city when comparing ourselves .
By that measure , we are a seriously productive 4,5 million people .
- We produce more food than we can eat.
- We milk more cows per Capita than anyone on the planet
- We export more food and non -food commodities than we could ever consume.
- We invite and get almost more tourists than our total population
- We have more jobs available than we can fill ( A lot of the remaining 5% unemployed are in the Moron catagory)
- And we dont mess about when it comes to getting things done , properly . Even if we take 5 years to build a road or re-build a City which takes 3 months in China , we build it to last
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