More stimulus required: ASB

The one bright spot in the economy has been a strong export performance, mainly led by the...
The one bright spot in the economy has been a strong export performance, mainly led by the agricultural sector. PHOTO: GETTY IMAGES
To a backdrop of global economic growth slowing further, the Reserve Bank needs to boost New Zealand's growth with further cuts to the interest-driving official cash rate (OCR), the ASB says.

The OCR was cut 25 basis points to a record-low 1.5% earlier this month and many analysts expect another similar cut later this year.

ASB chief economist Nick Tuffley's quarterly economic forecast said while global growth had slowed further, and US-China trade tensions had escalated, New Zealand's expected growth pick-up was taking its time arriving.

"A loss of momentum is creeping in globally. It's more a case of a below-par performance rather than anything dramatic.

"But here in New Zealand we have reached the point where more [Reserve Bank] policy stimulus is required to boost growth."

He said the Reserve Bank needed to provide further policy stimulus to meet its employment and inflation targets, and predicted another OCR cut to 1.25% this year.

The expectation of a lower OCR had already been largely passed on to some fixed-term mortgage rates.

"As a result, we expect lower interest rates to boost house-price growth, mostly outside of Auckland, and also to provide an extra boost to housing construction this year," he said.

Mr Tuffley was not expecting any fiscal stimulus to come from the forthcoming Budget later this month.

"We still expect the economy to start picking up, but it's taking slightly longer to happen than anticipated."

Mr Tuffley described the global economy as cooling after a period of above-average growth, and noted growth for 2019 and 2020 was expected to be below average.

He said that "unhelpfully, the big distracting sideshows of the past year remain" with US-China trade tensions having escalated in recent weeks.

"The US is back to imposing added tariffs on Chinese imports, which China is not taking lying down.

"It's still possible the world's two biggest economies do end up coming to an agreement. But right at this moment it is hard to read," he said.

He described the recent Brexit talks as a "farcical pantomime" in which the UK was eventually granted a Brexit extension until the end of October.

"That simply extends the period of uncertainty UK businesses have to contend with," Mr Tuffley said.

New Zealand's annual gross domestic product (GDP) growth in June last year was 3.2% but had "lost momentum" and was forecast to be just 2.2% in June this year.

Business confidence remained "woefully low", with challenges finding suitable staff, cost pressures and uncertainty over government policies.

Service sector demand was softening, including business and finance services and retail trade, while strong construction growth was now hit by capacity constraints, prompting strong construction cost inflation, Mr Tuffley said.

However, the one "bright spot" in the economy was strong export performance, largely led by the agricultural sector, which translated to robust growth in associated industries.

" However, many in the agri-sector are likely to focus on debt repayment this year and income growth in this sector may not generate the usual spill overs for the broader economy," Mr Tuffley said.

He also highlighted "storm clouds" on the horizon of the global economic outlook, as global growth slowed and geo-political tensions still ran high.

Comments

Mr Tuffley appears to be working from a 60yo economics textbook. All that creating an environment of low and falling interest rates will do is encourage firms to postpone investment (waiting for interest rates to fall further) and individuals to spend less and save more (to make up for the lower interest rates). So far from being stimulatory, the proposed approach will have precisely the opposite effect.

 

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