International independent research firm Capital Economics says the risks are 'skewed' to the RBNZ making more cuts, possibly into negative interest rates - 'if the Government doesn't step up it's game soon'

International independent research firm Capital Economics says the risks are 'skewed' to the RBNZ making more cuts, possibly into negative interest rates - 'if the Government doesn't step up it's game soon'

Economic growth slumping to just 1.5% by next year, unemployment surging and the Reserve Bank being forced to cut interest rates further are all on the menu ahead, according to international independent research company Capital Economics.

In an 'update' on New Zealand, Capital's Australia and New Zealand economist Ben Udy sees the RBNZ cutting the OCR to 0.5% (it's currently 1%) before the middle of next year, but he says the New Zealand Government needs to provide stimulus.

"...If the government doesn’t step up its game soon, the risks are clearly skewed towards the [Reserve] Bank cutting [the OCR] more, perhaps even into negative territory," he said.

Udy points out that the global economy has "not yet reached its trough".

"We expect trade-weighted growth in New Zealand’s largest export partners to slow from 3.0% in 2019 to 2.6% in 2020. That will hamper demand for New Zealand’s exports. We forecast export growth to slow from 2.7% this year to 0.7% in 2020. What’s more, slower global growth and concerns about the trade war seem to be weighing on business sentiment. We think business investment growth will fall from 0.5% this year to -2.5% in 2020. 

Udy says Capital Economics believes GDP growth in New Zealand will slump to just 1.5% in 2020 from 2.2% this year.

"That’s the weakest pace of growth since the GFC and much weaker than the RBNZ expects.

"And businesses surveys already point to falling employment before long. We expect the combination of subdued business sentiment and falling GDP growth to cause the unemployment rate to surge from 3.9% in Q2 to 4.7% by mid-2020," Udy said.

Capital Economics also believes that with the largest percentage increases in the minimum wage now behind us, wage growth in New Zealand has probably peaked, which should cause non-tradeable inflation to ease.

"That’s a key reason why we expect underlying inflation to fall from 1.7% in Q2 to 1.5% by the end of next year." 

Udy says the implications are clear: the New Zealand economy needs additional stimulus.

"Admittedly, the government may provide a bit of a boost. At the May Budget, the government significantly increased expenditure on social services. And it may now boost spending even further given the 2018/19 surplus was $7.5 billion, more than double the forecast in May.

"But the RBNZ has expressed doubt on whether the government will actually be able to spend as quickly as it claims given mounting capacity constraints.

"Indeed, the government recently called off its KiwiBuild target to build 100,000 houses in 10 years as it was ‘overly ambitious’."

Udy says to boost the economy the government needs to allocate some portion of its spending to achievable, growth-focused policies, such as tax cuts.

"We doubt that will happen until after next year’s election, which needs to take place by mid-November."

He says therefore if the RBNZ wants to ensure the economy gets the supports it needs it will therefore "have to do the heavy lifting by itself".

"We don’t think there will be enough negative news by the time of their next meeting in November to prompt the RBNZ to cut again. But by early next year, it will be clear that economic activity deteriorated further in the second half of 2019 and will continue to ease in 2020."

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Still sounds over 'optomistic' to me, but...
"the New Zealand economy needs additional stimulus." Quite right. But what is 'stimus'? It's not just a Government thing, it's also a social thing whereby 'we' all do our bit to stimulate the economy, and just 'buying stuff' isn't it (we are a net importer and so would just be stimulating someone elses' economy). It's about sensible application of capital/debt. Not more speculation, but putting it into business that 'make' something that we can either export, or more importantly, use ourselves. That's going to be a hard slog, given where we find ourselves now, but it has to be done, hence 'things' are going to get a lot worse ( see my first sentence!) before they better.


That would require a paradigm shift that is beyond the capacity of the current crop of career politicians to grasp fully, having lived in times far too good for far too long. What we need is a massive crisis to kick start the survival mechanism, so we can throw off the parasites that cloud our judgement and bleed our country. If you're not addicted to meth, you're addicted to cheap credit. From the perspective of dopamine release, it's the same high.

You're right. That's also the reason why successive stimulus efforts from RBA, Treasury, APRA and their state governments have failed so far to stir up anything but double digit price growth in their major cities.
Instead of focusing on more household consumption, we could aim at growth and prosperity from reducing our trade and current account deficits. The consumption side of our economy may still qualify as developed or high-income; however, our production means are lagging even in developing terms (compare our dominant industries with those in Malaysia, China).

Totally agreed. But would not count on much support in this direction by the present Govt.

Claudio Borio of the BIS says that government figures are "flattered" during booms. It seems it is not just the private sector that overstate how clever they are and how well they are doing when times are good.

Fiscal policy has typically been asymmetric. The authorities have failed to recognise that financial booms hugely flatter the fiscal accounts. Potential output and growth are overestimated, financial expansions are revenue-rich, and resources may be needed to repair banking systems when a crisis occurs. The long-lasting impact of the busts on output and productivity does the rest. The experience of Spain and Ireland is quite telling. Public debt relative to GDP actually declined in the run-up to the Great Financial Crisis (GFC), and observers thought that the countries were running cyclically adjusted fiscal surpluses. These purported role models of fiscal probity then faced a sovereign crisis once the financial cycle turned and their banks ran into serious trouble.

I think a 1% increase in unemployment is acceptable, I imagine the usual bankers and IT support will be turffed out on the street, like the collapse after Y2k

What collapse after Y2K?

Banks downsized their staffing, and Telcos from memory, just the end of an expansion era, there was a name for that recession.

It wasn't felt so much here in NZ because we were still on the ropes post asian economic crisis and we didn't have much of a tech sector like the more advanced economies. I was in London during those years and it was actually a three fold recession.. . The post .com and post enron bust AND post y2k backlash. Nasty! Once all the big companies realised they'd been conned into upgrading what didn't need upgrading they sacked their IT staff in violent retribution! But all was forgiven once the post 9/11 low interest rate kicked in and got the wheels spinning again. Neoliberalism...crazy stuff!

Thank you, I happened to be in Sydney and there were hundreds of job losses.

I happened to be in Sydney and there were hundreds of job losses.

I was in Japan marketing tech products to the world. The impacts were hard, but my clients were largely fiscally prudent and responsible. They were prepared. Minimal layoffs.

Interesting. The Japanese generally are prudent.
Thoughts on things here? I don't think we are so prudent, which is dangerous.

Their government definitely aren’t prudent! Debt currency sitting at about $150k NZ per capita - yikes! A nice little present for the next generation.

But almost all that debt is owed to Japanese savers. They aren't exposed much to foreign debt holders, and ultimately that gives them the ability to repudiate debt much more easily

We'll be fine this time around. Businesses could simply cut costs by hiring fewer young Kiwi graduates and overqualified migrants from Asia for entry level roles on lower salaries.
That's exactly what my employer did when the high-priced engg. work dried up after the mining boom ended in WA to compete on low value proposals.

And then the same employers 5-10 years down the line - "Where did all the engineers go? We are paying exorbitant amounts for qualified and experienced engineers!! The government and tertiary institutions must step up their game to train more engineers!"

Yeah.. the grads were there. They just went into other fields and not coming back.

Fewer big infrastructure projects on the horizon, and the pipeline of construction will slow.
So I definitely think we'll see job losses in design, infrastructure, construction.
The workload in many architecture offices is starting to slow


The big problem is our govt stupidly sold too many critical assets over the years to push demand in the economy. If we still owned the MOW we could increase employment by embarking on infrastructure projects. No use looking to the private sector in this country to do that because its virtually unscalable due to its poor investment trackrecord in productivity. At least Orr is looking ahead and moving in the right direction unlike Bollard who in 2007 and 2008 ignored the obvious stormclouds and went in the opposite direction and INFLICTED a recession on the country 6 months before the very obvious international difficulties washed up on our shores. You couldn't have done worse if you tried. Needless to say the Govt better get cracking on some helicopter money initiatives!

I believe they are throwing money at social services and that may support those that sink to the bottom.
As we import everything there is not much point in propping up consumer behaviour.
Throwing money at environmental issues would be a smart move for a government that wants another term.
Clean up our estuaries and harbours for example.

If we were counting properly, real growth has been negative for decades, 3-4 of them for NZ.

But because draw-down isn't factored into GDP and because reporters steadfastly refuse to widen their scope (thus ensuring politicians surely won't) we are measuring a self-justifying selection of numbers. And even then, they're turning negative. Who'da thought?

I love this theory that a minuscule tax cut will somehow boost the economy. Many households would be better off from the last interest rate cuts than they would from a tax cut - and that didn’t exactly ignite the economy.
A big tax cut may boost it a bit - but only temporarily (it is one off income growth) and then we will be left with years of deficits which I doubt are that good for economic activity.

The interest rate cuts take time to have an effect. I am refixing at the end of this month (hoping for another cut before then) and then another in Nov and then April. If the average loan is fixed for 1-2 years then only a small percentage will have benefited given it was only couple of month ago.

interest rates cuts - rob peter to pay paul. Any wonder they don't work?

These commie gloomsters , dear oh dear

Yeah those gloomsters with no vested interest in nz ey. What would they know?
Don't they know another property boom is just around the corner?

Mike, have you been out door knocking again?
How are your listings looking?
Can’t seem to find any for you?.

Year of delivery pfft. The only thing this Govt has successfully delivered to the people this year is measles.

Factor in that things go dead about 6 months before an election in the past and we are really going to hit rock bottom as summer 2020 draws to a close. Interesting times ahead but not in a good way. The COL need to pull a rabbit out of the hat right now and not promise one post election or they are gone burger.

Agree. They need to do something pre-election. After all, they don't have a great record of delivering on election promises, so many people including myself will be skeptical of election bribes.Budget 2020 is do or die for them

What they are going to do, just before the next election, is promise to build 10,000 houses per year.

Some of you will think you may have heard that before, but for most voters, they have very short memories.

If/when recession hits NZ then rather sensibly our Govt can partially control unemployment by savage cuts to those on work visas; the move from permanent residency to work visas has been smart. Recessions invariably hit public perceptions of immigrants.
INZ having a long tradition of arbitrary policy changes (a couple in the last month) which means they can simply stop the spouses of students working and kill the years work permit subsequent to studies that bribes our current education exports. Of course that would be heartless but that never stopped them in the past.

Good point. This has never been tested.
Wonder what impact 20k of people on work visas having to leave within 6 months would have on rentals

savers are out in the cold here

There is an opportunity to slap savings into KiwiSaver, growth funds still returning 6% or there abouts.

Follow the logic.

We have record low unemployment and record high numbers of people turning up at food banks.

So if we increase unemployment, then that will reduce the numbers of people needing to use food banks.

Do you think we are missing something.......?

This is great because our government hates business and loves unemployed people. The more unemployed people, they more votes our government gets. I think this is a winning strategy!

Absolutely wealth, health and education is certainly not a focus. Better to keep them poor, uneducated and unemployed to ensure they're dependent on welfare and vote Labour.