Economic outlook still positive: ASB

Investors are being told to expect less economic growth over the second-half of the year – but the slowdown should not last.

Wednesday, November 15th 2017, 6:00AM

ASB has released its latest Quarterly Economic Forecasts, which indicate short-term wobbles due to election uncertainty. But they should dissipate in time for growth to firm to about 3% per year by mid next year.

ASB chief economist Nick Tuffley said it was a typical market response to a new government.

“But we emphasise that any uncertainty is going to be short-lived. It’s important to remember the underlying economic picture is what will have the dominant influence on the business environment. Local and overseas influences point to overall economic growth around 3%, which is still pretty decent,” Tuffley said.

“Even with some looming changes to the Reserve Bank’s policy target, interest rates are still likely to be low for some time, certainly over the next year.”

He said the government policies likely to have the most economic effect included curbs on immigration, faster wage growth due to increases in the minimum wage and slightly weaker house prices.

Tuffley said the global economy was turning the corner, slowly. Political tensions and pressure points remained but the outlook had improved for most of New Zealand’s trading partners.

“At the centre of the improvement is China, with its improved outlook lifting many boats. As Chinese growth moderates over 2018, we anticipate that the global-growth baton will be shared around. With this in mind, we are cautiously optimistic that the global growth recovery can be sustained."

ASB is picking a rate of growth for China of 6.8% over the year.

The bank was also more upbeat on US prospects, with increased optimism that Trump could implement tax reforms to lift US growth.

"We anticipate that Congress is likely to pass modest tax cuts worth around 0.6% of US GDP in 2018 and 2019. As a result, we have increased our US GDP growth forecast for 2018 from 2.2% to 2.5% and for 2019 from 1.8% to 2.1%. Given the stronger US growth outlook, we also expect the US Federal Reserve to remove monetary stimulus slightly earlier than we had previously expected."

But Tuffley said the outlook for local interest rates was muddied by the new government, which plans change to the Reserve Bank Act.

"These changes are unlikely to change the average level of NZ interest rates over the longer term. However, by targeting two economic variables, rather than one, there is a chance that monetary policy could develop slightly differently over the economic cycle than if the RBNZ continued to solely target inflation."

He said, while the dollar had fallen since the election, the underlying dries of its strength remained in place.

"New Zealand’s near record-high Terms of Trade, strong export commodity prices and narrow current account deficit will continue to support the NZD outside of these near-term headwinds."

Tags: ASB interest rates investment Reserve Bank