Dairy drives softer growth outlook, says NZIER - Quarterly Predictions, September 2015

26 August 2015

New Zealand Institute of Economic Research (Inc)

Media release 26 August 2015

EMBARGOED until 1am, Wednesday 26 August 2015

NZIER Quarterly Predictions, September 2015

The downturn in the dairy sector has been the key influence in the softening pace of the New Zealand economy. Business and consumer confidence has deteriorated, with the effects most apparent in dairy-intensive regions.  

The effects of reduced farm income will reverberate through the economy as farmers rein in spending to ride out the poor seasons. We expect annual average GDP growth to dip to close to 2% by the end of this year, before rebounding over 2016 as the boost from the lower New Zealand dollar filters through to a broad range of exporting sectors.

Recent events in China highlight how quickly things can change. The surprise devaluation in the yuan by the Chinese government has raised fears about the true growth outlook for China’s economy. But the continued rise of its middle class bodes well for demand for our key exports.

An independent take on the New Zealand economic outlook is available exclusively to NZIER’s members in the latest Quarterly Predictions.

But other sectors grabbing the baton

The outlook for many other sectors is positive, and the economy is receiving a boost from continued strong net migration. Construction remains solid, supported by strong house-building demand in Auckland and a pick-up in demand for new office space and industrial buildings. We expect this will remain a key support of economic activity through the next five years.

Many export sectors are seeing an improvement in demand, with the lower currency providing an additional boost to incomes. Tourism is a standout, as more people are coming to visit New Zealand, staying longer and spending more. Meanwhile, demand for other commodities including beef, wool and kiwifruit is strengthening.

The Reserve Bank will cut again

Inflation in the New Zealand economy remains very soft, reflecting low global inflation and the earlier effects of the high New Zealand dollar. The recent drop in the currency will boost imported inflation early next year, but overall inflation should still remain below the RBNZ’s 2% target mid-point until 2018.

The Auckland housing market remains red-hot, with lower interest rates providing additional fuel. However, given the Reserve Bank’s primary focus on returning inflation to its target over the medium term we expect two further OCR cuts by the end of this year.

For further information please contact:
Christina Leung, 021 992 985, Christina.leung@nzier.org.nz

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