New Zealand Economy
NZ A Rose Amongst Thorns
The New Zealand economy has recovered at a solid pace since the recession in late 2010. The recovery has been better than most of our peers. The outlook remains positive, although there are brewing risks from slowing growth in Australia and China, an approaching peak in the Canterbury rebuild and a rampant Auckland housing market.
Auckland Housing Market
In Policy Sights Strong net migration, the Canterbury rebuild and an improving labour market remain the key driving forces behind domestic demand. The strength is also particularly apparent in Auckland, with strong population growth turbo-charging its housing market. Recognising the two-speed nature of the economy, the RBNZ will restrict lending to Auckland property investors from October 2015. The RBNZ expects the introduction of these additional macro-prudential tools to only have a modest impact on the housing market. Subsequently, the Government also announced plans to tax the gains of property investors by applying stricter criteria in a bid to dampen speculative demand for housing, and free up Government-owned land for housing development.
Activity Moderating In Some Areas
Elsewhere, activity is softening. The growth impetus from the Canterbury rebuild will fade as the residential repairs programme draws to a close later this year. However, the pick-up in commercial and infrastructure work will support Canterbury construction activity. Regions exposed to the dairy sector are also feeling the pinch, as lower export incomes start to bite.
Chinese Transition Challenge
Offshore, China is navigating its unsteady transition from investment-led to consumption-led growth. Policymakers eased monetary policy in response to slowing activity. But in doing so, authorities risk prolonging the distortions and inefficiencies in the economy that they have been so keen to reduce. Policymakers face a tough balancing act, with further slowing of the Chinese economy likely in the meantime.
RBNZ Will Not Move On Rates…
Inflation is low globally and major central banks are maintaining very loose monetary policy. New Zealand is importing this low global inflation, further helped by a high New Zealand dollar. There is little inflation domestically, reflecting an uneven recovery and excess capacity in parts of the economy.
…But Needs To Control Housing With Other Tools
The RBNZ remains on a tightrope – balancing very low inflation and rising global risks against solid but unspectacular economic growth and a rampant Auckland housing market. To react to one would risk further stoking the other. We expect interest rates to remain on hold over the remainder of 2015 and 2016.