Kiwibank economists say monetary policy is proving ineffective without fiscal support and we need 'strong, wise and expansive fiscal policy'

Kiwibank economists say the country’s flagging GDP growth figures highlight the need for strong fiscal policy from the Government.

Their comments came as Statistics New Zealand released figures for the June quarter showing that GDP rose 0.5% in that quarter, and 2.1% between the June quarter in 2018 and the latest quarter.

The figures were largely in line with market expectations, but the 2.1% annual growth figure is the slowest rate since 2013.

Kiwibank chief economist Jarrod Kerr and senior economist Jeremy Couchman said the 2.1% figure is well below the 2.75% “potential” the economy could be growing at based on things such as population rates, participation rates and productivity.

“The importance of potential is it offers us an estimate of where we should be running. And we should be running faster,” Kerr and Couchman say.

“What’s needed, is a strong fiscal policy. Monetary policy is proving ineffective without fiscal support. The budget is more important than the RBNZ’s MPS.”

The economists say what is needed “to snap us out of limbo”, is strong, wise, and expansive fiscal policy.

'Step up and do their part'

“Central banks around the world, including the RBNZ, are calling for Governments to step up and do their part. Departing [European Central Bank] president Draghi said last week, as he cut rates and restarted QE, that “Now is the time for fiscal policy to take charge”. And in New Zealand, we have no funding excuse.

“Funding is in ample supply, and done dirt cheap (to quote Australia’s hardest export, AC/DC). There’s nearly $17 trillion invested in government bonds with NEGATIVE interest rates.  Those (predominantly foreign) investors would love to see more Kiwi Govies to buy at +1%. And we could issue +30-year bonds for international insurance companies, super funds and locals ACC and NZ Super. It’s not hard.”

Turning to the next Reserve Bank review of the Official Cash Rate next week the Kiwibank economists said they expected no change, but that there would be a cut in November to 0.75%.

“The risk of another move to just 0.5% is rising,” they say.

Dragged down

ANZ economists are already forecasting that the OCR will be dragged down to 0.25% next year.

And ANZ senior economist Miles Workman said after Thursday’s GDP release that data continue to reflect an economy that has continued to slowly lose steam over the first half of 2019.

“And with forward-looking indicators continuing to slip, this process looks set to continue for a while yet,” he said.

“But it’s not just the domestic economy that looks set to disappoint the RBNZ’s August [Monetary Policy Statement] forecasts. Trading partner growth has also been softening – and as a small open economy that’s a growth anchor to be particularly concerned about. 

“While we’re not expecting growth to roll over (our forecasts are for annual growth to bottom out at a little below 2% in Q1 2020), we do think inflation pressures will wane in this environment. We expect the RBNZ will use the tools it has available to lean against that (and keep inflation expectations from deteriorating significantly). We have pencilled in 25bp cuts in for November, February and May, taking the OCR to just 0.25%.”

The GDP detail

In terms of the detail in Stats NZ’s Thursday release, GDP per capita increased 0.2% in the June 2019 quarter, following an increase of 0.1% in the March 2019 quarter.

For the June 2019 year, GDP per capita was up 0.8%.

As expected a bounce back in service sector activity was the biggest contributor to the growth in the latest quarter. The sector makes up about two thirds of New Zealand's economy.

Stats NZ national accounts senior manager Gary Dunnet said activity in service industries rose 0.7% in the June 2019 quarter, following a 0.3% rise in the March 2019 quarter. Growth was widespread, with eight out of the 11 service industries showing growth.

Main drivers

The main drivers of growth in services industries include rental, hiring, and real estate services (up 1.0%); transport, postal, and warehousing services (up 1.8%); arts, recreation, and other services (up 2.8%); and public administration, safety, and defence (up 1.8%).

Goods producing industries fell 0.2% in the June quarter, driven by declines in manufacturing and construction.

“Both of these industries rose in the March 2019 quarter,” Dunnet said.

“This quarter, lower investment in non-residential building and a decline in food, beverage, and tobacco manufacturing led to the falls.”

Construction fell 0.8% this quarter, following two consecutive quarters of strong growth in construction, up 3.4% and 2.2% in the March 2019 and December 2018 quarters, respectively.

Growth in electricity, gas, water, and waste services partially offset these falls in goods-producing industries, rising 3.1% in the June 2019 quarter.

Milestone for the economy

The size of New Zealand’s economy in annual current price terms hit a milestone in the June 2019 quarter, reaching $300 billion for the first time.

“It took about 14 years for the economy to go from $100 billion to $200 billion, and nine years to reach $300 billion,” Dunnet said.

Activity in primary industries grew 0.7% in the June 2019 quarter, recovering from a 0.5% fall in the March 2019 quarter.

Agriculture, forestry, and fishing production rose 1.6% in the June 2019 quarter, off the back of two consecutive falling quarters. Agriculture (up 1.1%), forestry and logging (up 1.9%), and fishing (up 1.2%) all grew this quarter.

Activity in the mining industry decreased in the June 2019 quarter, down 4.4%, after three quarters in a row of growth. The main driver for the fall in mining was a drop in exploration activity.

Household spending

Household spending grew 0.5% in the June 2019 quarter, following a 0.4% rise in the March 2019 quarter. Spending on durable goods increased by 0.8%, while household spending on services rose 0.5%. Spending on non-durable goods remained flat in the quarter.

Investment in fixed assets dropped 1.0% in the June 2019 quarter, following 2.7% growth in the March 2019 quarter. This was largely due to lower investment in non-residential building, which fell 3.7%. The fall was partially offset by a 2.1% increase in investment in plant, machinery, and equipment.

Exports of goods and services fell 1.8% in the June 2019 quarter, following a strong 2.7% growth in the previous quarter. The main drivers of the fall were exports of dairy products and exports of meat products, falling 8.9% and 2.6%, respectively. An increase in exports of coal, crude petroleum and ores, and gases partially countered the fall, rising 20%.

Imports of goods and services fell 0.3%. This is largely due to falls in fuel imports and imports of passenger motor cars.