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How Moody's Analytics assesses New Zealand's economic prospects: good growth, low inflation, buoyant housing, expanding population - and rising risk

How Moody's Analytics assesses New Zealand's economic prospects: good growth, low inflation, buoyant housing, expanding population - and rising risk

By Faraz Syed*

New Zealand was arguably the standout regional Asia-Pacific economy over the past three years.

GDP expanded more than 3% and employment gains were plentiful; the jobless rate has fallen to 5.3%. The housing market-led consumption growth drove the economy, with house price gains averaging 7.8% in 2014 and 2015.

Driven by higher population growth, consumption will continue its pivotal role in buttressing growth, and GDP will likely expand 2.8% in 2016.

But risks are downwardly skewed, and the untethered growth is unlikely to last. The tailwind from the Canterbury earthquake reconstruction is nearly over, as the rebuilding activities likely peaked in 2015. Elsewhere, given low dairy prices and suppressed farm incomes, external headwinds will sting more than in previous years. The economy is expected to come out relatively unscathed but not without a helping hand.

Inflation, growth and exchange rate risks

The Reserve Bank of New Zealand is set to undershoot its inflation target in 2016, setting the stage for further monetary easing. On the back of low oil prices, CPI growth - rising 0.4% y/y in the March quarter - has been subdued.

Outside the hot housing market, disinflation seems entrenched because of lower costs of global imported goods. With commodity prices falling further, imported inflation is unlikely to rise in coming months.

Domestic demand is also approaching its peak. The post-earthquake rebuild of Christchurch has buttressed economic activity, particularly in the Canterbury region. Building construction there still outweighs that in the rest of the nation, and that trend will likely continue for the remainder of 2016.

However, with most of the investment pipeline filled, we are unlikely to see a further boost from reconstruction in 2017. Indeed, business investment in nonresidential building fell 2.63% y/y in the September quarter of 2015. This follows double-digit growth in 2014.

Low external demand is expected to persist. Though drought conditions haven’t intensified, low dairy prices will have added pressure to farm incomes.

To add to the weak external demand, the kiwi has risen again in 2016. This has been a common trend for the antipodean currencies, as global interest rates have fallen further. A firming kiwi erodes New Zealand’s international competitiveness.

On the back of the subdued developments - low inflation, weak external demand, and high exchange rate - we expect the RBNZ to cut the official cash rate to a low of 1.75% by year’s end. The RBNZ has already cut the rate by 125 basis points since the start of its easing cycle in 2015. However, more rate cuts could fan the housing market further, increasing speculative investment activity.

More housing market momentum

The RBNZ is attempting to douse the housing market with macroprudential measures. These measures, designed to curb investor-driven speculation, include restrictions on loan-to-value ratios, forcing banks to hold more capital, and adding penalties to purchasers selling within two years.

Thus far, the efficacy of these measures is questionable, as house prices continue to climb at prodigious rates. Despite adding extra measures to cool the Auckland property market, median house prices rose more than 13%.

Initially, the Auckland market was flagged as troublesome, as house prices rose more sharply there than in rest of the nation. However, in recent times, housing activity across the rest of the country also has risen. Nationwide house prices increased more than 4% y/y in March, while Wellington (up 7.1%) and Waikato (up 22.4%) also had strong gains.

With the household-debt-to-income ratio in excess of 150%, risks to the housing market are simmering. The RBNZ will likely announce additional macroprudential measures in 2016, though the details are sketchy.

Growth engine’s hidden truths

Strong net migration - more than 68,000 people in 12 months to February - has driven population growth. New Zealand’s population grew around 2% per quarter in 2015.

Assuming this population growth continues in 2016, we are likely to see GDP per capita fall or remain flat. This is also based on current GDP year-ago growth rates of around 3%.

Indeed, the rising unemployment rate throughout 2015 was indicative of the runup in the labour force participation rates. Though the jobless rate dropped to 5.3% in the December quarter, a further population increase is unlikely to be offset by a similar amount of jobs. Job-adds and other consumer confidence indicators suggests that overall employment conditions have softened.

While the economy continues to fly high, we believe the increased risks will likely see GDP growth step down a notch in the coming years.


Faraz Syed is an associate economist in the Sydney office of Moody’s Analytics. He covers national and metropolitan economic issues across the Asia-Pacific region.

To read more on New Zealand’s economy please visit Economy.com

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49 Comments

It's the GDP growth per capita which is the major disappointment. Shows the need for improving our quality of migrant.

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No, the NET change isnt huge ergo its nothing really to do with the quality of migrants who buy and large have to be well qualified and experienced.

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what do you base that assumption on, it does not equal the stats, last time I looked at the list there were heaps of jobs you only needed knowledge for not education.

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We were taking about migration where for most ot get in you need good quals and experience, not job vacancies. Or can you provide some URLs?

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Most migrants and students/PR grads are not moving into or staying medium/long term in high skill jobs.
Most are happy with Any job, as long as they wangle their way through the relatively ( to other western countries) easy requirements. Unless of course you are a highly skilled Westerner, then you'll find migration to NZ more difficult.

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Within the context of your assertion of "qualifications", how do you rationalise away the annual recruitment of 2500 chefs being approved entry under the skills visa

Over 5 years that's 12,500 chefs. Are that many new restaurants and take-aways being set up in NZ

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Are they work visas or perm residency?
On top of that we see 55,000 (say) coming in per per month. 55 x 12 = 660000 per annum, 2500 chefs per annum is 0.37% of the total, hardly huge and probably not significant.

In either case they should be stopped and NZers trained though.

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67,619 new residents in the year to March. 3.73% were chefs?

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This is the pathway:
Gain entrance to a course @ tertiary provider. Get Visa.
Get job related to course.
Get Permanent Residency.
Give up course related job.
Go work for extended family restaurant or petrol station or taxi co etc as no checking by Immigration once PR granted.
This is how NZ is being flooded with unskilled/semiskilled people from emerging economies.
While NZers are being sold the story of 'skills based immigration'.

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Bit naïve- most seek either higher paying jobs or potential to earn more.
Most buy their own homes instead of renting and whinging they cant afford it.

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Analyse those figures in conjunction with the several-years-on unemployment figures for migrants, and what emerges isn't 'huge shortage of chefs' but 'huge ongoing immigration fraud'.

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On the back of the subdued developments - low inflation, weak external demand, and high exchange rate - we expect the RBNZ to cut the official cash rate to a low of 1.75% by year’s end. The RBNZ has already cut the rate by 125 basis points since the start of its easing cycle in 2015.>

And when the outcome is the same, that is "subdued developments", pray tell what to do thereafter? Japan has done the same for 10 years and more without material outcomes, to point to, beyond the impoverishment of the ordinary citizen.

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and indeed the downward trend aka japan looks as expected, as the younger generations dont buy into the over-valued stocks and assets. http://www.zerohedge.com/news/2016-04-21/faith-gone-middle-class-flees-…

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We (Moody's and I) are reflecting upon the failed obession of believing CPI inflation at or near 2% is coincident with economic recovery/growth. Most citizens in all jurisdictions have so little in the form of savings that the purchase of stocks is never an issue. I for one have never willingly bought a share in my life.

I have firmly believed stock markets were overvalued as far back as the late 70's and they are certainly overpriced today

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2% CPI used to be a fair indicator of economic growth, in fact I'd still suspect it is in terms of real growth and not where financial make believe / ponzi schemes are blowing up GDP, its really an illusion IMHO.

Sure I can see its a failed obsession, but we cannot grow for ever on a finite planet, yet our entire system and promises of all political parties is wedded to that. Without oil however it will not happen.

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The ECB left its stimulus programs unchanged, as expected, after expanding them at its March 10 meeting.

Draghi stressed, however, that the eurozone's top monetary authority will do more if unexpected trouble hits the currency union.

The current level of inflation — zero — is regarded as unhealthy and remains far below the bank's goal of just under 2 percent annually. That is its definition of price stability, the job it has been tasked to do since it first started setting monetary policy for euro member countries in 1999.

The ECB is already buying 80 billion euros ($91 billion) in bonds from banks each month through at least March 2017. The purchases are made with newly created money — something the ECB can do as the euro's legal issuer. Increasing the supply of money in the banking system and the economy should, in theory, increase inflation and growth. Read more

Maybe someone can take Draghi by the the hand and ask him to take a rest from such a futile and unrewarding mission?

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"I have firmly believed stock markets were overvalued as far back as the late 70's and they are certainly overpriced today"

And yet, even a modest investment in a buy and forget S&P 500 index fund in the late 70s would have made a fortune.

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An even bigger one was made buying leveraged long duration sovereign bonds - the UST 30 year yield fell from ~15.0% in 1982 to 2.71% this morning.

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Nominal GDP growth is about 4-5%.... ( most of in in consumer spending )
M3 broad money growth is between 8-10%... ( most of this growth is in credit creation )

GDP is measured in "Dollars"... (don't need to be a rocket scientist to see that increasing money supply creates a "smoke and mirrors kinda growth..??? )

There is nothing healthy about New Zealands' growth...
If one digs deeper.... and looks at NZs' ..."robustness".... NZs' ability to handle a shock or adverse conditions..... it is getting worse.... and worse...

The ONLY wayNZ is "making ends meet".... is by borrowing overseas...AND by encouraging Immigration and Foreign Direct Investment.... ( buffet uses the analogy of selling little pieces of the family farm in order to maintain a desired standard of living ).

NZ is in a state of Chronic current acct deficits..... ie... we have to borrow from overseas in order to make ends meet.... We are the proverbial ..."Debtor Nation"..

AND... we seem to be, simply, "doubling down"... on debt as our answer to creating GDP growth..???

Flying towards Turbulence seems like an apt, thou understated , metaphor for NZs' future..???

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"The ONLY wayNZ is "making ends meet".... is by borrowing overseas...AND by encouraging Immigration and Foreign Direct Investment"

But everyone does that.

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The 4.69% fixed 2 yr mortgages are now looking very expensive.
Fixing for more than 6 months or 1 year holds a high likelihood of being trapped on expensive rates.

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The big banks seem to agree. Their 6 month rates are rather high at the moment. One year and 18 month fixed are good rates in general but 1 year fixed is the better bet. I went for one year fixed myself.

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Its the best bet by a country mile at the moment. The thing that shirts me about NZ mortgages (apart from the interest rates) is the lack of choice. Is there such a thing as a lifetime tracker (tracks the OCR to an agreed % above for lifetime) or offset (only charged interest on the difference between a savings account and the actual balance).

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Yes. Many banks offer offset deals in NZ.

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Thanks - Funny they aren't offered with as much vigor as floating or fixed. What about trackers?

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Offset deals are a v. big part of both Kiwibank and especially BNZ's home loan marketing, part of their point-of-difference. Both these are majors.

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Wondering about borrowing, but would it be wise to wait until the new OCR is announced,(but then the big 4 have to factor in management bonuses), so I guess we just factor in that X-Y=0.

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The OCR is now irrelevant. Go for short term fixed rates.
1 year will be down to 3.5% or lower next year as the entire system implodes.

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Why do you say that? Has America, Britain or Europe descended into the dark ages because rates are close to zero? Bring it on - Rates to 0.5% and hurry up about it!

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Any of the fixed rates are better than the rates most people pay for floating rate or their current fixed term mortgages. You could refix for 6 months at a higher rate than the one year if you think the rates are going to fall a lot.

You might want to consider that banks are reluctant to drop their rates due to high mortgage demand so if there's a 0.5% OCR fall we might only see a 0.3% reduction or less.

Something to consider.

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GDP is a phony measure of economic activity, with negative activities and outcomes being ascribed positive values. The more there are of the following- road accidents, divorces, illness (requiring spending on medical services), overeating (leading to obesity), alcohol consumption (leading to accidents, illness or death), earthquakes (requiring rebuild), deliberately knocking down perfectly serviceable buildings, floods, fires, conversion of agricultural land to urban use, overpopulation etcetera, etcetera -the better the GDP figures because disasters (in all their forms) and greater unsustainability generate more spending, more wastage of resources, more employment and more financial transactions.

It naturally follows that a healthy society that conserves resources and uses them wisely is 'bad for GDP'.

Not only does the GDP-focused system encourage wastage, inefficiency, duplication and long-term unsustainability but it is also a prime driver of the planetary meltdown we are currently witnessing, since all economic activity in industrialised societies is dependent on conversion of fossil fuels to CO2.

Atmospheric CO2 is at a record high and is rising at an accelerating rate: Daily CO2 April 22, 2016: 407.95 ppm versus April 22, 2015: 403.83 ppm, up 4.12 ppm year-on-year and substantially higher than the average of 3.1ppm for 2014 -2015, and nearly twice the 2.11 ppm per annum for 2005-2014.

This accelerating rise in atmospheric CO2 suggests 'we' will exceed the total carbon budget necessary to maintain life on this planet before 2025. (That's if we have not already exceeded it -a very likely scenario.)

Needless to say, the accelerating planetary meltdown will cripple the global economic system within a few years, as a direct consequence of economic activity measured as 'good' by GDP acolytes; the effects are already dire -93% bleaching of the Great Barrier Reef, record throughout the world, temperatures, record ice melt etc.- and every aspect is going to get (be made) a lot worse a lot faster.

That such an idiotic system as GDP should still be in use is a clear indication of the institutionalised lunacy that pervades industrial societies. .

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Obeseballarina - I am actually falling off my chair at your comment. Are you one of those kiwi ostriches? I suggest you look at the hard economic data emerging from all over the world. I'll even give you a hint.... Real GDP is falling below expectations all over the world. Now Google it

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No, I'm just not a crash troll. Sure there are risks everywhere but are we 6 months away from Armageddon? Not even close.

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You might want to look at the 42 volcanoes currently errupting on this planet. But no... ALL the co2 is man-made isn't it? Those volcanoes have nothing to do with it.
And buy the way....plants love co2. It makes them grow.
Yeah it's all man made. So what do you exhail? Time to stop breathing you are killing the planet!
Seriously folks, co2 was far higher in the past. And the earth thrived. This is a cycle. I would be more concerned about the increasing volcanism and increasing earthquakes. Where the next one gunna hit?
But no... You just believe all co2 has nothing to do with current volcanism levels. No correlation there

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The same old silly arguments regurgitated time and time again by abrupt climate change deniers who haven't got a clue how the world works or deliberately muddy the waters for political reasons.

Volcanic activity has not changed significantly from century to century, nor even from decade to decade, yet atmospheric CO2 has been increasing inexorably since humans first stated building blast furnaces and making large amounts of concrete, and at an ever faster rate:

Currently around 180 ppm above the 800,000-year average and around 130ppm above the pre-industrial average, and rising stepper than ever.

https://scripps.ucsd.edu/programs/keelingcurve/wp-content/plugins/sio-b…

Industrial humans are altering the composition of the atmosphere and oceans at a rate faster than any time in geological history, altering in just two centuries what natural processes took tens of thousands of years to alter.

Industrial humans are responsible for the ongoing death of the Great Barrier Reef and are causing the fastest meltdown of the Arctic ever witnessed.

https://ads.nipr.ac.jp/vishop/vishop-extent.html

Never let facts interfere with a 'good' ideologically-based argument.

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Have you also noticed cubic metres of ice in both poles are showing signs of accumulation? And um... Vietnam had snow this year. So did Mexico. Aren't they tropical countries? Oh surely we can't be entering a global cooling phase? Those 42 erupting volcanoes can't have anything to do with it. Blame it on the poor 3rd world nations...burning coal to cook their dinner

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The key to dealing with tree huggers is don't engage tree huggers.

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So where is the scientific data supporting your absurd claim of increased ice?

'On April 22, 2016, the sea surface was as much as 11.3°C or 20.3°F warmer than 1981-2011 (at the location off the coast of North America marked by the green circle).

High ocean heat is further accelerating Arctic sea ice demise, as the Gulf Stream keeps carrying ever warmer water into the Arctic Ocean. The image below, created with an image from the JAXA site, shows that Arctic sea ice extent was well under 13 million km2 on April 19, 2016, and about 1 million km2 less than the extent in the year 2012 around this time of year.' (2012 being the previous record meltdown year.)

https://ads.nipr.ac.jp/vishop/vishop-extent.html

and

http://robinwestenra.blogspot.co.nz/2016/04/more-extreme-weather-with-a…

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A monetising idea for DC. Charge Commenters 20c per comment!
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=116…

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Good idea!

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Slippery slope David. Charging people for voicing an opinion? Way to kill a conversation I say. And dare I say what happens to the voices who can't afford? Who represents them?

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The Daily Telegraph has turned off comments while it revamps. Its lost 30% of its traffic. Implement at your peril.....

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Yeah, paywall is a real turn off. Comments are often more interesting than the articles. I study the comments more closely than the actual articles - except for the auction results!
Everyone is going right wing, hence the comments shutdowns - they're the cool kids now.
Look at what happened to Tay.

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I for one would decide that the faff of registering a credit card wasn't worth it, question whether I trust the site with that information anyway, and wander off, probably forever.

Remember when the NZ Herald tried having a paywall, and quickly discovered that nobody was deranged enough to want to pay actual money for Garth George's idiot drivellings? HA HA HA No.

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The NZ Herald tried offering free delivery when people stopped paying for the drivel they churn out.

No thanks, not even for zilch. After all, drivel is drivel, and why would anyone want to waste time on it, let alone pay for it?

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In the case of this site, there's plenty of content that's completely worthless, but the commentary is good. The half-baked, badly-reasoned, badly-written dross churned out by the NZ Initiative is garbage that doesn't stand up to the slightest scrutiny, but it brings out the thought-provoking best in the commenters. Disable commentary, and why would anybody bother to click on it?

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perhaps the first 50 comments per month free - and then charge for additional comments - there are a few people around here on self-interest.co.nz who could then put their money where their numerous comments and opinions are.

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hmmm ...    ;)

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There are already parallel comment streams running on reddit that don't have over the top moderation. A paywall would just push it all out there.

Anyway, this website can't even fix the double post problem or get rid of that stupid flag.

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