Bank tells Government it can spend more
By Richard Harman (author)
Though stock markets around the world have fallen this week and here dairy prices continue to fall, but a major bank has produced a remarkably optimistic forecast for the New Zealand economy.
What will delight the Government is its argument that the coalition can afford to spend more at the next Budget.
Westpac’s Chief Economist, Dominick Stephens concedes that the Bank’s previous forecasts have been more optimistic than others.
And that’s the case this week too with the ASB producing a more downbeat forecast.
Stephens says the bank’s last “Economic Overview” predicted a near-term economic pickup.
“That call was against the grain of sentiment at the time, but it is now clear that the economy is indeed improving," he says.
“We expect the economy will continue to improve for a while yet, before a renewed slowdown sets in for the early-2020s.“
The Banks says recent GDP figures have been “somewhat choppy – the details suggest that growth was temporarily soft in the first quarter of this year and temporarily strong in the second. ‘
“But the underlying picture has been one of moderate growth, though down from the heights reached a couple of years ago.
“Compared to our last Economic Overview, we have slightly upgraded our GDP forecasts for the next couple of years.
“Our view remains that the next phase for the local economy will be a pickup in the pace of growth, aided by government spending, low-interest rates and renewed growth in homebuilding.
“But we also see this upturn as short-lived, with slower population growth and a weaker housing market to weigh on spending as we head into the next decade.”
Specifically, on Government spending, the Bank says the latest fiscal accounts suggest that the Government has plenty of room to manoeuvre.
“The tax take has continued to run ahead of forecasts, even if the economy itself hasn’t.
“Net core Crown debt has dropped below 20% of GDP years sooner than expected, though this is partly due to persistent delays in capital spending.
“Our view is that the Government will continue to struggle to ramp up capital spending by as much as planned, but that this will leave even more room to increase operational spending – and there will no doubt be many demands on the public purse in the coming years. “
The ASB’s “Quarterly Economic Forecast “ also published this week is not so upbeat.
It says that so far the economy has held up relatively well in the face of two high-profile uncertainties: stubbornly-weak business confidence and escalating trade tensions.
“Nevertheless, we expect growth in the last part of 2018 and early 2019 will be a touch softer than what it could have been, slightly below 3% instead of slightly above.
“Weak business confidence has been upgraded in status from an elephant in the room to a neon sign with fireworks going off behind it.
“There are some early signs that business confidence is stabilising, albeit at a level usually consistent with weak economic growth.
“Trade tensions, capacity constraints, and cost pressures with contracting profit margins will be part of the story.
The Banks says it is clear from specific surveying that uncertainty about government policy is an important influence behind the weak level of sentiment.
“As the Government firms up key policies over time, the added uncertainty businesses seem to be feeling at present should subside.
“Nevertheless, we expect that some business capital expenditure will be deferred in the short term, taking the edge off NZ’s near-term growth performance.”
It may be that the ASB which as a bank has a strong Auckland focus is accurately reflecting sentiment there but may missing what is happening in other parts of the country.
Westpac says some distinct regional differences are becoming apparent.
“In part, these differences are the consequence of a pattern of regional population growth that is very different today compared to a few years ago.
“Auckland still has the fastest growing population, but the pace has slowed substantially from its peak in 2015.
“Canterbury’s population growth rate has also slowed following an influx of construction workers and returning residents after the earthquakes.
“In contrast, population growth stepped up sharply across the central and lower North Island and in Otago between 2015 and 2017, and has slowed only slightly in the past year.”
The Bank suggests that changing patterns of migration are probably playing a significant role.
Foreign arrivals are slowing, and a growing number of those who arrived in recent years on temporary visas are now leaving.
“Since migrants tend to be concentrated in Auckland, this partly explains why population growth has slowed more in Auckland.”
It says in other parts of New Zealand it feels as though there has been bo economic slowdown.
“These regions are still experiencing accelerating rents, rising house prices, strong economic activity and high confidence.
“The pattern of demand for workers has also notably shifted.
“Growth in job vacancies has slowed in Auckland and Canterbury, but has picked up strongly in other regions.”
Given the Government’s commitment to regional growth and its desire to see house price inflation slow in Auckland, Westpac’s report will be received warmly in the Beehive.
The Opposition, on the other hand, will take some solace from the ASB report with its conclusion that ”business confidence remains weak and points to a slowdown in growth over the second half of 2018, led by a fall in business investment over the coming year.”
That two banks could produce in the same week two such dramatically different forecasts suggests that there is every reason for business to be uncertain about the future.
But because the forecasts are based on estimates of future movements in things like oil prices or international trade --- there is not much the Government can do.
The worry could be that both banks think that things could slow in 2020 --- election year.