NZ: New Government’s policies will boost GDP - Westpac
Analysts at Westpac, note that market opinion generally seems to be that the new Government’s policies will boost GDP, inflation and the OCR.
“We agree with that, but only up to a point. Increased government spending will certainly boost activity, but the crowding-out of private activity must also be considered. Meanwhile, the Government’s plans to cool the housing market and reduce net migration will weigh on the economy next year. Our view remains that the Reserve Bank will not need to raise interest rates until late 2019.”
“Last week’s data releases highlighted some of the conditions we see for a slowdown in growth in the near term. Retail spending eked out a modest gain of just 0.2% in the September quarter, after a 1.8% rise in the June quarter. This was partly a comedown from major sporting events such as the Lions rugby tour in the June quarter, reflected in particular in a sharp drop in accommodation and hospitality spending in September. But there has also been a more widespread slowdown in spending growth compared to recent years, especially in housing-related categories such as furniture and hardware.”
“In New Zealand, consumer spending growth tends to be closely correlated with the strength of the housing market. The latest slowdown in retail spending suggests that the relationship is alive and well. House sales are down by about a third from last year’s peak, and the double-digit house price growth we saw in previous years has given way to a period of quite subdued gains.”
“The other notable development last week was a further fall in dairy prices at the latest GlobalDairyTrade auction. The decline in dairy product prices since the middle of this year, despite cuts to milk production forecasts in that time, suggests that the weakness lies on the demand side of the equation.”
“The outlook for dairy isn’t gloomy by any means – we expect a farmgate milk price of $6.20/kg for this season, which is close to the average of the last decade. But it’s likely to leave farmers cautious about new spending and more focused on debt reduction, after two very poor seasons in 2015 and 2016 that put a severe strain on dairy farm balance sheets.”