NZ: Fiscal boost on the way - HSBC

New Zealand's economy continues to grow strongly, underpinned by record population growth, a booming tourism sector, strong agricultural export earnings and high levels of construction activity, points out the research team at HSBC.

Key Quotes

“Growth has not been as strong as it could have been, because investment has not been adequate to keep up with the needs of such a rapidly growing population. A large part of this story has been ongoing fiscal restraint. This may be about to change.”

“The result of New Zealand's 23 September election was unclear at the time of writing, but it looks likely that whomever forms the next government is likely to loosen the fiscal purse strings. Both major parties have pledged additional funding for infrastructure, while the centre-right National party intends to cut income taxes and the centre-left Labour party plans to boost funding for public services. In either case, the result should be more stimulatory fiscal policy. With strong population growth and the government operating balance showing a healthy surplus, more public investment spending is affordable and should support growth.”

“Although the economy has been growing strongly in recent years, there are few signs that it is close to overheating. With strong population growth, per capita GDP is up only 0.3% over the past year. Because the migration surge has been driven by labour market factors, the labour force has grown rapidly and thus the unemployment rate has been slow to fall despite strong jobs growth. Wage growth therefore remains weak, even in sectors like construction that are booming and where there is anecdotal evidence of capacity constraints.”

“As a result, wage growth and inflation remain subdued. Thanks to higher petrol and food prices headline inflation has risen to around 2% in the past few quarters, but most measures of underlying inflation remain too low. After an extended period of low inflation, the RBNZ is taking a very cautious approach and higher interest rates look unlikely until underlying inflation reaches 2%.”

“We expect strong population-driven growth to continue, although lower construction activity in H1 2017 sees our 2017 GDP growth forecast lowered to 2.8% (3.2% previously). Growth is forecast at 3.3% in 2018 (unchanged) and 2.9% in 2019. With inflation pressures still muted,  we don't expect the RBNZ to lift its cash rate until Q3 2018.”