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Pre-election Economic and Fiscal Update 2017

Recent Developments

Economic expansion has continued at a moderate pace…

This section discusses recent developments and their implications for the economic outlook.

The economy appears to have grown at a moderate pace, on average, so far this year. Economic growth slowed over the six months to March 2017, reflecting both temporary factors, including the Kaikōura earthquakes and bad weather, and more persistent factors, most noticeably in the housing market. Recent indicators point to a faster pace of growth over the June quarter (Figure 1.1). The Treasury estimates the economy grew 2.8% over the year ended June 2017.

Figure 1.1 - Economic growth (GDP, production measure)
Figure 1.1 - Economic growth (GDP, production measure).
Sources: Statistics New Zealand, the Treasury

…although the housing market has eased…

Long-term global bond yields rose late last year leading to a rise in the cost of funding for New Zealand banks and to an increase in two-year mortgage rates of around 45 basis points, although mortgage rates remain low in historical terms. Loan-to-value ratio restrictions were tightened late last year, particularly for investors, and bank lending criteria for residential property developers have also been tightened. These developments have contributed to slower growth in total new residential mortgage lending, fewer sales of existing dwellings and slower house price growth, particularly in Auckland.

Residential investment activity eased in the March quarter and growth in dwelling consents, which provide an indicator of future activity, has slowed (Figure 1.2). The slowdown in dwelling consents has been most pronounced in Canterbury, where earthquake rebuild activity is winding down. Nationally, activity in the industry is at a high level and there is some evidence from surveys and discussions with businesses that the supply of labour and other resources are tight and are constraining growth in activity, particularly in Auckland. The pressure on resources is being reflected in rising construction costs (Figure 1.2).

Figure 1.2 - Dwelling consents and costs
Figure 1.2 - Dwelling consents and costs   .
Source: Statistics New Zealand

Looking ahead, still-low interest rates and strong population growth will continue to support housing demand. However, tighter financial conditions and higher construction costs point to a slower pace of growth than previously forecast, although it is difficult to know how much of an impact these developments will have or how persistent they will be. The lower level of activity in Canterbury may release resources for use elsewhere and increased availability of public finance may hasten the pace of infrastructure investment. On the other hand, mortgage interest rates could increase further and/or high levels of household debt may have made household borrowing more sensitive to past interest rate increases than assumed.

...growth has been supported by higher export volumes and improved terms of trade…

Other recent indicators point to a stronger pace of growth in the second quarter of 2017 following a March outturn that was weaker than expected. In particular, export volumes rebounded following a period of weakness and export prices increased further over the June quarter. Goods import volumes also increased strongly, although part of the increase appears to be related to the timing of fuel imports, which can be lumpy, and is expected to be temporary. Services export activity will benefit from the British and Irish Lions rugby tour, although much of the impact is expected to be recorded in the September quarter when most of the supporting visitors departed. Import prices remained subdued as oil and fuel prices weakened, helping offset a fall in the exchange rate. These price movements are providing additional support for the terms of trade, which are expected to rise to their highest level in over 40 years in the June 2017 quarter, and are boosting national income.

Table 1.2 - Unemployment rates
Latest available Unemployment  rate
Japan 2.8
Korea 3.8
Germany 3.8
United States 4.3
United Kingdom 4.4
New Zealand 4.8
Australia 5.6
OECD 5.8
Euro area 9.1

Source: OECD

The improved international outlook evident earlier this year has been largely confirmed by recent data. Growth in the major advanced economies has strengthened and unemployment has fallen. In a number of countries, unemployment rates are low in historical terms, although most countries in the OECD are above New Zealand and it remains high in the euro area (Table 1.2). Wage growth remains weak and inflationary pressures are subdued.

Growth in Australia has slowed in recent quarters, partly because of temporary factors, but appears to have recovered in the June quarter. Business confidence has improved, employment growth has strengthened and retail sales have picked up. In China, growth has remained stronger than in 2016, buoyed by policy stimulus, particularly for property construction and infrastructure. Consumption growth has remained robust, supporting imports of food products, including from New Zealand, and stronger foreign demand has boosted exports. Stronger growth in China and increased global trade volumes are helping to sustain solid growth in trade-dependent Asian economies.

Stronger foreign demand, particularly from China, has supported prices for dairy, forestry and horticultural products, while meat prices have been underpinned by tight global supply (Figure 1.3). Export prices are expected to ease a little this year but to remain high and to add to domestic demand.

Figure 1.3 - Commodity export prices
Figure 1.3 - Commodity export prices.
Source: ANZ World Price Indexes

Growth in household spending seems to have continued at a solid pace, supported by past gains in employment, improved export returns, rising wealth and favourable consumer sentiment. Net migration inflows have remained high, propelling population growth to its fastest pace since 1974, and are adding to domestic demand.

…and business investment has picked up

Growth in business investment has picked up in recent quarters, driven by business equipment investment. Following a period of strong growth, non-residential building investment fell in the March 2017 quarter. This fall is expected to be temporary and forward looking indicators point to a solid pipeline of activity over the forecast period.

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