ANZ NZ's economics team looks at key themes for 2015; Here's theme two: Is NZ a poster child in the post-GFC era?

Over six articles we're publishing a detailed outlook from ANZ NZ's economics team on six key themes for 2015.

Here is the second one. (The first one is here.)

By Cameron Bagrie*

The New Zealand economy has typically been “rolled” by one of two dynamics:

• A global event; or

• A build-up of internal imbalances and weaknesses that necessitate a purging process.

Mother Nature can play a role too but doesn’t usually dominate the overall economic cycle.

The first risk is very real, and is covered in Theme 5.

The second represents a group of indicators that don’t typically make mainstream media commentary, but which are critical in assessing the potential durability of an expansion and the probability of a pending correction.

Recall that the New Zealand economy entered recession prior to the GFC and the Asian Crisis. Drought and the RBNZ played a role during the latter but the seeds were sown by deteriorating structural metrics; the economy was “primed” for a crunch.

A quick glance through a few key indicators reveals:

• Household debt is still high but off historical peaks.

It stands at 156% of disposable income compared to 161% in 2007. Household debt servicing, at just over 9% of disposable income, is higher than it was a year ago, but still well below the circa 14% level evident during the GFC.

• Net external debt has fallen to 60% of GDP from 85% of GDP at the time of the GFC.

• The current account deficit has fallen to under 3% of GDP from close to 8% of GDP in 2006. The annual goods balance has moved from deficit into surplus, with lower credit growth and borrowing costs contributing to a narrowing in income deficits to GDP.

• Credit growth has generally tracked below the growth in nominal GDP. Deleveraging has dominated and the household sector in aggregate is no longer using the rising value of housing collateral as an ATM.

• The household savings rate has been in positive territory since the March 2009 year.

• The fiscal accounts are back on track for surplus after letting the automatic stabilisers work during the downturn and absorbing the up-front costs of rebuilding Christchurch. Net public debt – at less than 30% of GDP – is world class.  Inflation is low and productivity is rising. No need for the RBNZ to be heavy-handed.

• Banks have successfully lengthened the terms of a large proportion of their funding, making the New Zealand economy less sensitive to capital outflows and variation in global funding costs. Around 86% of loans and advances to the domestic financial system are being funded domestically or for terms longer than one year.

Some metrics remain at disconcerting levels – house prices and household debt levels are high in relation to incomes and nationwide household saving is low.

There are still some concerns on other levels.

The global scene is highly uncertain, and our dependence on trade and overseas capital leaves New Zealand vulnerable to adverse external events. Domestic twin risks dominate, namely house prices – particularly in Auckland and the concentration of debt in the dairy sector. House and land prices are high in relation to incomes, with the economy and financial system vulnerable to abrupt falls in asset values. Potential catalysts include a deteriorating outlook for incomes courtesy of an aggressive turn in the global scene (we are watching Asia and Australia), or a sharp move higher in (currently low) residential and rural interest rates for borrowing.

On the whole, though, one must conclude that the New Zealand economy is in better shape, structurally speaking, suggesting that the party can rock on a little longer. But equally there are aspects that require continued attention, and possibly active intervention if pre-2008 style behaviours resurface.

THE NZD – HARD TO GET TOO BEARISH ABSENT A GLOBAL EVENT

One “fundamental” matters in regard to the NZD; it is the general outlook for the economy, and it still looks okay.

While commentators can point to lower commodity prices as justification for the NZD moving down, that is only a necessary condition and not a sufficient one. Strong economies don’t tend to have weak currencies.

Strong net migration, high domestic confidence, an improving housing market, and increasing labour market utilisation are supporting the NZD.

Growth is slowing, but from an above-trend rate towards trend; 3% growth is not something to be sniffed at.

Courtesy of best-in-class yields and a solid growth outlook, the NZD will remain supported during times where global drivers are on the back foot. However, yield and economic growth are a well-trodden path and a well-known story. As recent falls in the AUD and NZD illustrate, yield and growth are not always enough to stem currency declines when volatility and uncertainty is high.

Potential downside risks to the economy – and thus the NZD – continue to dominate global market thinking. The candidates are pretty clear; dairy prices have halved, the terms of trade are in retreat, and the RBNZ is repeatedly saying the NZD is unjustifiably and unsustainably high. And they have now stated that rates could move up or down.

But until the domestic economy rolls over, a default bid will remain for the NZD.

• There is a glaring 300 basis point yield differential with countries accounting for 70% of global GDP.

• Given the bond ladder (JGBs 0.25%, German Bunds 0.4%, US 10-year Treasuries 1.8% and NZGBs double that) and a world awash with liquidity, NZD dips will be bought.

• Rock-solid economic credentials are the modern day rock-star. New Zealand looks stellar compared to peers.

• New Zealand is showing signs of no longer being a hi-beta play on the global scene. Suddenly NZGBs have become defensive plays and the New Zealand equity market is holding up well vis-à-vis global peers and ructions.

• Dairy prices are down but the terms of trade are still elevated. And when we eye the relative paths over the medium-term for the price of butter versus TVs, steak versus cars, and seafood versus clothing, we remain bullish on the trend for the terms of trade.

• There is a secular story to be mindful of. As growth in China rotates from investment to consumption so too do capital flows. That’s NZD/AUD supportive.

• Success comes with a catch. The NZD is overvalued but the economy has coped. New Zealand is starting to stand out as a poster child in the post-GFC era. The microeconomic platform is being put on a pedestal internationally. Amidst cyclical volatility in the NZD, capital will still be biased towards New Zealand.

And so we have a central scenario of elevation for the NZD.

It’ll move down against the USD courtesy of the USD heading up, but it’s difficult to get bearish against other currency pairs.

All this is subject to the huge caveat that the global scene remains stable.

That may seem like a heroic assumption but we’re not into picking black swan events. Previous shakeouts in the NZD have been linked to global events. Any big move over the coming years will be driven by the same.

All eyes are on China.

NO POST-CHRISTCHURCH REBUILD HOLE

The economy – and particularly the Canterbury region – is being supported by earthquake rebuild-related activity.

There is a growing perception that the economy is then set to fall into a hole as the rebuild stimulus fades. The argument is logical enough. While rebuild activity will last another decade, the peak in the profile is rapidly approaching, and as this fades, the incremental boost to growth becomes a drag.

While the latter fact is a mathematical truth, we disagree regarding the impact on the aggregate economy for a number of reasons.

• The stimulus peak from the rebuild is just under 2% of GDP, but this has been steadily building over four years, and the stimulus will similarly fade gradually from its forecast peak in 2017. We suspect the rebuild will take longer than forecast, but irrespective, people know it will peak in the coming years and this gives them time to adjust and plan accordingly.

• The Christchurch rebuild stimulus has been offset by contractionary fiscal policy. There are regional and sector facets to this. But fiscal policy will not remain contractionary indefinitely; politicians won’t keep their hands off the loot.  The scaling up in irrigation-related development across the Canterbury Plains will also provide a boost for the region. 

• A host of the Canterbury rebuild-related work is necessary for replacement demand impetus to occur: tourism, education and CBD activity being examples. As the city “recovers” (is rebuilt), activity in these areas should recover too.

• The rebuild is placing pressure on aggregate demand; the unemployment rate in Canterbury is a shade over 3%. Some fading in momentum is to be expected given supply-side constraints. Fading momentum is not a downturn.

• Christchurch is chewing up resources that could otherwise be devoted to other activities. These resources can be redeployed ex-post, boosting growth elsewhere.

• Various automatic stabilisers will adjust as appropriate. As activity from the rebuild fades, so too will (some) pressure on the OCR (and indirectly on the NZD).

Within this aggregate story, there will be regional-specific aspects to manage.

Waning rebuild activity is Christchurch-specific; less contractionary fiscal policy is a national phenomenon. Resources will therefore need to adjust. The onus is on local policy-makers and businesses to get alternate drivers of growth into place in a timely fashion.

For Christchurch to flourish post-rebuild, key microeconomic facets and sectors need to be firing.

The likes of the education sector, manufacturing, agriculture, tourism and the port (we note growing competition from Timaru) need to be performing well. Identifying and unlocking alternate drivers of growth need to be at front and centre, and we can see that on some levels.

It’ll be a failure to drive broader regional activity that will determine the post-rebuild bog for Christchurch (or not), not waning rebuild activity itself.

INFLATION – A FOOT IN EITHER CAMP

There is a strong likelihood annual headline CPI inflation will fall into negative territory over early 2015, and it will certainly be below the bottom of the RBNZ’s 1-3% band over the year.

Having such a low rate of inflation is not entirely surprising, as it is a global phenomenon.

Declines in oil prices feature heavily; falls in petrol prices alone are enough to knock around 1% off headline inflation. However, forecasters (including ourselves) have a track record of over-estimating inflation in recent years. Back in the December 2012 MPS, for example, the RBNZ has projected that CPI inflation would end 2014 at 1.8%, with the forecast consensus generally higher than that.

Annual CPI inflation has been below the midpoint of the inflation target for the past three years, with sub-2% core inflation for the last four.

With the New Zealand economy posting reasonable rates of growth in this period, the question remains whether the current spate of low inflation reflects transitory or more enduring features.

Of the deflationary factors we can identify, falling oil prices, the high NZD, euro and yen weakness (which should reduce capital goods and car prices), and net migration boosts to labour supply fall into the category of “temporary but sticky”.

There are some more enduring influences too, with higher productivity containing unit labour costs (at least in New Zealand), excess manufacturing capacity globally driving disinflationary forces, household restraint, low rates of credit growth relative to incomes, better-anchored inflation expectations, and rapid technological change. The latter is growing in significance. Witness Uber (competition in the taxi market), booking hotels over the internet, the prevalence of online shopping – price comparison has become significantly easier, and margins are shrinking as a result. See Theme 1: Change is the New Normal.

Surveyed measures of inflation expectations have eased and remain clustered around the midpoint of the inflation target; that’s helpful.

Pockets of pricing pressure remain, most notably in the construction sector, but to date they have not filtered through into more generalised price lifts – a welcome dynamic.

Our projections assume both transitory and enduring influences continue to go head-to-head; we’re taking the classic two-handed economist approach on this.

The proof, however, is in the pudding, and the longer inflation remains low, the more pressure will build for a rethink over the relationships between the real economy and inflation.

THINKING BEYOND CHINA

The speed of the increase in New Zealand’s trade connectivity with China has been staggering.

Merchandise exports have been compounding at 23% per year since the New Zealand-China free trade agreement was signed in 2008. China now takes half of our wool and forestry exports, and its share of our seafood, dairy, sheep-meat and beef exports have risen sharply. China is now our second-largest source of inbound tourists.

With opportunity and connectivity comes vulnerability – either through adverse internal market developments (eg. regulatory risk, such as recent changes in the infant formula arena) or wider macroeconomic forces (i.e. a material turn in the Chinese economy). The latter represents a significant source of risk over the coming years as nations that built up considerable leverage during the era of low interest rates adapt to higher US rates as the US Federal Reserve starts to normalise interest rates settings (refer Theme 5).

While China is now New Zealand’s largest merchandise export market – at around 20% of total exports – the concentration risk argument can be overplayed.

• China is a huge market; it represents 19% of the global population and 12% of global GDP. They should always be material as a trading partner.

• New Zealand is pursuing an aggressive free trade agreement (FTA) agenda, which is opening up new trade opportunities. In fact New Zealand already has FTAs in place with 28% of the global population and 18% of global GDP. Additional FTAs currently under negotiation cover a further 43% of global GDP and 30% of the globe’s population. That’s a big playground. Alternative opportunities abound.

• New Zealand has hardly been standing still in other markets. In fact, over the last five years double-digit growth in merchandise exports has occurred for 46 of the countries New Zealand trades with (22% of total). We export more than $100 million worth of goods and products to 43 countries each year. Exports into many of these countries, such as Bangladesh, Brazil, Turkey, UAE, Peru and Chile, have been growing in excess of 20% per annum.

• We believe many businesses have created, or are in the midst of creating, propositions that can be easily transferred to alternative markets if things go awry in China. While China is currently the largest market for many of these propositions, it doesn’t mean other markets won’t rise to match – or even out-compete – China in the future.

However, New Zealand can ill afford to be complacent.

One of the dangers of embracing huge opportunities in one market is that you become blinkered to wider developments and other opportunities that are fast developing in other parts of the Asian region (and further afield, such as in South America).

With this in mind, we took a deeper look at the wider Asian region.

Data availability is a constraint; nonetheless we’ve attempted to identify the key characteristics that might make countries attractive export markets for New Zealand-orientated products, and the key obstacles currently holding them back.

We selected six broad categories to assess the potential of different Asian export markets using a range of indicators for each. The key was the breadth of indicators we looked at; 29 in total. We didn’t focus on population or GDP alone.

The key categories were:

• Food market size and development;

• Consumer purchasing power and affluence;

• Alignment with New Zealand-orientated trade;

• Market access; 

• Regulatory and political risk; and

• Supply and cool chain development / infrastructure.

We collected data for 30 countries in the Asian region, reaching the following broad conclusions:

• For food market development and size, Japan was most attractive, followed by China, Korea, Hong Kong and Singapore. Beyond the top five, some of the more interesting up-and-comer rankings were for Malaysia, Kazakhstan, and Azerbaijan.

• The top five for consumer purchasing power and affluence were Singapore, China, Hong Kong, Japan, and – surprisingly – Mongolia.

• Looking at alignment with NZ-orientated trade (i.e. countries that consume large quantities of what we produce, and produce large quantities of what we import) revealed some surprises – the top five being Armenia, Mongolia, Japan, Korea, and Brunei Darussalam.

• Less surprisingly, Hong Kong, Brunei Darussalam and Singapore took out the top three spots in regard to market access, as no tariffs are applied to primary products. They were followed by Indonesia, the Philippines, Malaysia and China.

• In terms of supply and cool chain development Singapore and Hong Kong took the top spots, with Japan, Malaysia and Korea rounding out the top five.

Overall, the top 5 (of 28) ranked countries were Singapore, Hong Kong, Japan, Korea and China. Not surprisingly, these are already well-established export markets for many sectors.

The up-and-comers threw up a mix of a few less well-known nations and some more familiar names. They include Malaysia, Brunei Darussalam, Kazakhstan, Azerbaijan, Thailand, Armenia, Indonesia and Vietnam.

All up, while much of the focus has been on the Chinese market, New Zealand seems to have opportunities aplenty in the broader Asian theatre too.

But it doesn’t stop there with other areas, such as South America, likely to become more of a focal point over coming years. This will accentuate New Zealand’s time-old problem as espoused by the Chinese President Xi Jinping on his trip down-under late last year: “New Zealand will have to worry about the fact that there is more Chinese demand than you can possibly supply.”

Taking into account the long-term maths of emerging market demand, modernisation of the food chain in new markets, westernisation of emerging consumer taste preferences, opening up of new cultural segments, preferential access to a wide range of markets (including traditional ones), strong business relationships with key multinational foodservice and retailers – it all looks pretty impressive to us.

With the demand side taken care of (in trend terms at least – these countries do have business cycles), what will matter is the execution of chosen strategies by businesses to extract the maximum value from the opportunities available. There will also need to be strong support from government and the regulatory environment. There have been lots of encouraging signs from many sectors, with a number of success stories, but what is required is a continuous loop of strategy development, execution and refinement in a world that changes rapidly. We cover some encouraging developments in the tradable sector below.

AUCKLAND’S HOUSING WOES

Auckland house prices have risen by more than 40% over the last three years – compared to around 25% in Canterbury and less than 10% elsewhere. Auckland median house prices are around eight times median household incomes as compared to under six for other New Zealand centres.

A combination of factors look to be behind Auckland house price growth:

• Large cities globally have seen surging price growth; witness London, New York, Sydney, etc.

• Urbanisation and higher population growth – Auckland’s urban population has increased by roughly 50% since 1991, as opposed to 17.5% for the rest of the country. Subnational population projections suggest Auckland’s population growth will continue to outstrip other regions, approaching 2 million people by 2031. Auckland is likely to account for around half of the 20,000 additional households in New Zealand per annum over the next 20 years. This cumulates to big numbers – remember the close to 400,000 additional housing units required over the next 30 years cited in the Unitary Plan for Auckland.

• A concerted period of underbuilding. Building consents per head of population decreased markedly in Auckland following the building boom years of the mid-2000s. The number of building consents issued for new dwellings in Auckland has more than doubled since its early 2009 trough, but is still only a shade higher than historical averages. Our regional housing demand and supply estimates are approximate, but they continue to pinpoint a housing shortfall in the Auckland and Canterbury regions. Within the existing dwelling market, inventory levels are very low in relation to sales (around 2 months on average compared to historical norms of closer to 7) – a key factor underpinning prices.

• Poor planning and execution. You don’t get sustained periods of underbuilding for no reason. If there is not much land available, the price goes up. And high-priced land means it can become uneconomic to build affordable houses. It isn’t just about zoning. It’s also about putting time limits on development to stymie land banking by investors.

• Regulation. Bring on the reform of the Resource Management Act (RMA).

• Tastes. You can’t just blame the market for not addressing shortages. Many people now want and expect bigger houses, rather than starting with a smaller one in a cheaper suburb. It’s not exactly reasonable to complain it is harder to buy a first house if that first house is twice the size our parents’ was.

• Attitudes. Auckland needs to go both up (highrise and more intensive housing) and out (i.e. more land). This brings us to the NIMBYs, where self-interest interferes with group interest.

• The investor market. The fact that the rents in Auckland have not yet moved up sharply (though admittedly anecdotes are turning) tells us to be wary of the supply-shortage theory as dominating too far.

• The Asian and global factor. Forget the xenophobic hysteria. Auckland has a diverse ethnic mix and it’s impossible to disentangle offshore from residents’ purchases. But anecdotally, the demand is strong from offshore. And why shouldn’t it be? Property here looks cheap by global comparison, and New Zealand looks a nice place to be amidst global challenges and woes.

• Costs. Costs for consenting, land, or construction; all have moved up rapidly. Poor productivity growth across the construction sector hasn’t helped either.

The situation is now problematic on a number of levels.

• The more you binge, the greater the odds of a correction – a risk the RBNZ is alert to, as are we. Housing cycles have been historically closely linked with economic ones, given more than two thirds of measured household wealth is in housing. Recent council valuations placed the value of the Auckland residential housing stock at approximately $475bn, more than twice our nationwide annual GDP.

• It’s driving tensions between Auckland and regional New Zealand; regions see the Government pouring billions into Auckland (and Christchurch) and ask, what about me? That sort of resentment is not good for stability.

• The more internalised Auckland becomes with its housing challenges, the greater the risk that the connections between Auckland and the rest of the nation play second fiddle. The broader economy needs a strong Auckland just as Auckland needs the rest of New Zealand; it’s the dominant gateway into the New Zealand story. But that’s a catch-22, because for Auckland to flourish and act as the gateway, housing woes need to be addressed.

• Rising house prices have lifted housing costs in the Auckland region relative to elsewhere. According to the 2013 Census, Auckland homeowners spent more than 15% of their income on housing, higher than other regions. Close to 60% of Auckland owner-occupied dwellings still had an outstanding mortgage, as opposed to around 50% elsewhere. In 2013 almost half of crowded households in New Zealand were in Auckland. The number of persons per dwelling in Auckland (around 3) is above those of other centres (closer to 2.5).

• Deteriorating housing affordability in Auckland has coincided with falling home ownership. In 1986 home ownership rates in Auckland were similar to the rest of New Zealand at (73.9% versus 73.6%). Since then home ownership rates in Auckland have fallen relative to the rest of New Zealand (61.5% vs 66.5% of households owned their home or held it in a family trust by 2013).

• It’s one factor exacerbating income inequality given the proportion of income now being spent on housing.

The array of challenges and reasons for Auckland’s woes mean you can forget about a quick fix, but we are seeing movement.

In response to the 2011 Productivity Commission enquiry into housing affordability, a number of workstreams examining land supply restrictions, paying for infrastructure development, productivity in the construction sector, and costs and delays in the regulatory process have been undertaken. Under the Special Housing Areas Act (2013), development can be fast-tracked (3 months for brownfield and 6 months for greenfield applications), with the council taking a more flexible approach to granting the resource consents necessary for subdivision and development. Recent proposed changes to the RMA are designed to further improve the supply and address the rising cost of building.

Until the Auckland Unitary Plan becomes operative in 2016, the Auckland Housing Accord targeted the creation of 39,000 new residential sections and dwelling consents to the end of September 2016, with targets of 9,000, 13,000 and 17,000 each year respectively. Progress is being made, with close to 8,000 consents lodged and 11,060 new dwellings and sections created in the September 2014 year. More than 80 Special Housing Areas (SHAs) have been created during the first year of the Accord, which are expected to accommodate 43,000 new dwellings, with about the same number of other dwellings already in the pipeline according to MBIE estimates.

This is a good start, but the lags are long. We are at the early stages of what is likely to be a long road ahead. Dwellings still need to be built, and work on infrastructure (including roads, sewage and schooling) completed. The challenge will be doing this while avoiding the economy blowing an inflationary gasket, and simultaneously ensuring that crucial investment flows toward the productive sectors of the economy are not impeded. Already annual residential construction cost inflation in Auckland is running at 7%, higher than in Canterbury, and the rest of the country.

Putting in place more affordable housing will entail a different construction sector response than has been seen in the past, where new dwelling supply has tended to come in the form of large, expensive dwellings. The demand side will also have to reflect new realities, given that the ageing of the population structure is likely to lead to smaller household sizes. Auckland’s housing stock is changing as the city reacts to its growing population and high costs for residential land, with more multi-storey homes and apartments, greater density, and fewer unoccupied homes making the dwelling stock different to the rest of the country. These trends need to continue. New ways could also be found to utilise current shelter in Auckland more effectively. According to 2013 Census figures over half of four-bedroom dwellings in Auckland had 2+ bedrooms spare.

Beyond the obvious policymaker desire to lift the supply of houses, we’re mindful of other facets that will need to come together.

• Market mechanisms are also influential in matching the demand and supply for dwellings, and shouldn’t be overlooked. Census estimates point to a small internal migration outflow from Auckland to other centres (NB: this is distinct from external migration, which does benefit Auckland). Auckland is not a big sucking vortex pulling in the rest of New Zealand at all. Waikato and the Bay of Plenty have benefitted; this tells us that market forces still have a role to play.

• The proposed reform of the RMA has to have real teeth. We’ve seen encouraging broad principles so far but no substance.

• The construction sector needs to lift its game in regard to productivity growth. The finger can’t solely be pointed at regulations and costs. Incremental improvements such as reusable concrete boxing and more use of pre-fabricated units all help. Perhaps in the future we’ll be pouring our houses out of a tube. The technology already exists. In the meantime it would certainly help with construction costs if the average kiwi didn’t feel the need to play architect and make their house design unique. But it seems to be in our DNA.

• Political capital is going to need to be burned taking on the likes of the NIMBYs.

• Auckland’s challenges are also opportunities for some regions. There is an opportunity for regions to proactively target Auckland businesses that are aligned to strengths in their regions. We’re for more co-ordination in terms of regional development, though the key elixirs of regional growth and opportunities need to come from within regions themselves.

• It’s looking increasingly likely we’ll see another prudential response targeting the property investor market this year.

• Political rhetoric will be strong in regard to offshore buyers too, though it is very unlikely that this Government will take any measures that would substantially impede the flow of foreign capital.

Solving Auckland’s housing challenges is far from simple. You can’t point the finger at one catalyst (i.e. shortages) and building more as a response. The challenges are immense.

We’re just pointing out that a multi-pronged approach is going to be necessary to at least keep the magnitude of the issues in the orange zone as opposed to the red hot one.

NET IMMIGRATION

Migration has been a key supporting factor for the economy.

Net permanent and long-term (PLT) immigration inflows are expected to peak below 55,000 persons by mid-2015. This is equivalent to around 1.2% of the resident population, the highest inflow since at least the early 1960s.

In contrast to flows in Australia, net immigration inflows are highly cyclical in the New Zealand context, and are generally viewed to be a major driver of New Zealand business cycles – although we note that the current strong net migration episode in New Zealand is both a cause and a reflection of relative domestic strength. Migration flows depend on a range of economic, social and legal considerations, both here and abroad.

Net immigration is the difference between two large and volatile numbers. At present, PLT arrivals currently outnumber departures by roughly two to one. The high quality of life on offer in New Zealand remains a magnet, with PLT arrivals approaching 2003 and early 1970s peaks as a share of population. However, the major swing variable behind the recent pick-up in PLT immigration has been low PLT departures, with the strong domestic outlook in relation to our trading partners keeping would-be emigrants off the plane. Traditionally New Zealand has tended to act as a spring board for migration inflows into Australia, but net departures across the Tasman have slowed from a flood to a trickle.

The traditional view is that net immigration inflows tend to add more to demand than supply, mostly via their impact on the demand for dwellings. In the current episode, however, close to two-thirds of the increase in net immigration has come via reduced PLT departures, which are generally more geographically widespread and represent people who are closely integrated into the supply of labour. More than one-quarter of PLT arrivals are also returning New Zealand citizens. Along with high numbers of arrivals from elsewhere, this will help address capacity bottlenecks. This suggests less of an impact on capacity pressure than would otherwise be the case. High rates of labour force participation, low rates of wage inflation and a reasonably modest response from the nationwide housing market to strong net immigration support this view, although pressures on the housing stock in some parts of the country (eg. Auckland) remain acute.

While the global scene is fickle, our expectation is that improving prospects for our trading partner economies, most notably Australia, will trigger a lift in PLT departures by the end of the year. Despite this, New Zealand is expected to remain a highly attractive destination for incoming migrants and we expect this to prevent a return to negative rates of net immigration that typically follow large net inflows.

We expect annual net PLT inflows will slow to around 25,000 persons by the end of 2017, the fabled soft landing, although risks and uncertainties remain.

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*This report was written by the ANZ New Zealand economics team which consists of chief economist Cameron Bagrie, senior rates strategist David Croy, senior economists Sharon Zollner and Mark Smith, economist Peter Gardiner, senior FX strategist Sam Tuck, and rural economist Con Williams. It is used with permission. Theme 1 is here.

A link to Theme 1 - Change is the new normal, is here.
A link to Theme 2 - Localised focal points, is here.
A link to Theme 3 - The trend is your friend, is here.
A link to Theme 4 - Our key downside risk, is here.
A link to Theme 5 - Liquidity vs fundamentals, is here.
A link to Theme 6 - Addressing income inequality, is here.