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Spending by the new Government is likely to be increasingly stimulatory to the economy, helping keep economic growth averaging 3.4% for 2018 and 2019.
On Thursday, New Zealand First leader Winston Peters announced he would form a coalition with Labour. The Green Party will provide confidence and supply and have ministers outside Cabinet.
All three parties want to spend money, particularly on rail infrastructure, but also on health and education.
Infometrics’ latest forecasts showed the economy still had more gas in the tank for next year, despite the slowdown of the past 12 months and suggestions from some analysts all the economy’s key drivers had peaked.
Chief forecaster Gareth Kiernan said the most recent GDP data from Statistics New Zealand showed government consumption spending rising at 4.4% annually, its fastest rate since National came into power in 2008.
"This pick-up in spending growth reflects the increased room for new fiscal initiatives, given the government’s books are firmly back in surplus territory. This trend is likely to continue under the new governing coalition."
Infrastructure pressures, affordable housing provision and more money for low to middle-income earners would all boost economic activity during 2018 and 2019, he said.
The most contentious area of potential growth was probably the construction industry.
The current market slowdown would normally be a precursor to a drop-off in residential building activity. However, Infometrics saw potential for the market to behave differently this time, Mr Kiernan said.
The loan-to-value restrictions, tight credit conditions and affordability issues had cramped investor demand for housing.
The Auckland market remained grossly undersupplied. Even with net migration starting to ease, it would take many years for the region’s shortage of 42,000 dwellings to be addressed, he said.
"This shortage implies further increases in residential building are necessary, even if house prices start easing from recent highs."
Capacity constraints remained a threat to growth in construction. Shortages of tradespeople, land supply issues and civil infrastructure limitations were all factors that could prevent further significant increases in residential activity.
Surveys showed both skilled and unskilled labour was becoming increasingly difficult to find. Wage inflation, which had been subdued to date, was likely to increase during the next 12 months, Mr Kiernan said.
The overreliance of the economy on an expanding population was likely to be exposed in the medium-term as the stimulus from housing and construction waned.
At 126% of disposable income, household debt was now well above its previous peak of 118% when the global financial crisis hit. When taken in tandem with gradual interest rate rises, the debt would act as a handbrake on consumer spending growth, he said.
Looking beyond 2020, sluggish domestic conditions would put the onus on the export sector to underpin overall economic growth.
Modest economic growth rates in key export markets of China and Australia suggested New Zealand could find it difficult to maintain positive per-capita growth in the early part of the next decade, Mr Kiernan said.