(Bloomberg) -- For a small economy whose fortunes often rise and fall on the global tide, New Zealand’s biggest threats in 2018 may come from within.
Business confidence has plummeted since the election of a center-left government, there are predictions that house prices will fall, and an unusual spell of dry weather has raised the risk of a drought. Reforms at the central bank, which will get a new governor in March, are adding to the sense of uncertainty.
The question is whether the economic slowdown that’s underway will be more pronounced than currently expected. Financial markets have already reduced bets on an interest-rate increase from the Reserve Bank next year and some forecasters expect the New Zealand dollar to weaken significantly as the economy, once dubbed a rock star, under-performs its peers.
Investors are “increasingly nervous and unsure about New Zealand’s prognosis,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “We remain cautiously optimistic. But the clouds are gathering and it will be imperative that the weather treats us well, international commodity prices remain robust and the government wins the confidence of business sooner rather than later.”
ANZ Bank’s gauge of business sentiment has slumped to depths not seen since the global financial crisis, when the economy was in recession. While some of that is likely due to the business community’s grumpiness with the election outcome, a prolonged funk could curb investment and hiring and hurt economic growth.
The economy expanded a healthy 2.7 percent in the year through September, and the statistics office this week revised significantly higher its estimates for gross domestic product over the past four years. Yet annual growth has slowed from 4.4 percent in mid-2016.
“The figures still show a marked slowdown in 2017 and I think the economy will continue to lose momentum into 2018,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland. “One of our key calls for 2018 is a lower exchange rate as we move from ‘rock star’ to ‘has-been’.”
Westpac predicts the New Zealand dollar, which has weakened 4.2 percent against the greenback since the Sept. 23 election, will continue to fall in 2018. It forecasts the kiwi will drop to 63 U.S. cents by the end of the year from 70 cents today.
That would provide a boost for economic drivers such as tourism, the country’s biggest foreign-exchange earner, and dairy, which accounts for more than a quarter of exports.
“While we retain a generally positive view on medium-term prospects” for the economy, “we see the cooler picture persisting over the next few quarters,” said Phil Borkin, senior economist at ANZ Bank New Zealand in Auckland. “Throw in some unease regarding the new political direction, and more recently the dry weather potentially hampering agricultural production, and we see a reasonable chance of a growth wobble.”
Dairy farmers, who are struggling with global prices at their lowest in a year, face a further reduction in income if drought conditions worsen. Fonterra Cooperative Group this week warned that dry weather has caused soil moisture and pasture quality to decrease, impacting milk collection.
Falling House Prices?
A decline in rural spending could filter through to the cities, where consumer confidence is waning amid cooling house-price inflation. Government policies to curb immigration, build more homes and reduce tax incentives for residential investors could see house prices start to fall, said Stephens.
“Most of those policies are an improvement for the long-run welfare of New Zealanders, but the short-term effect is going to be, I think, falling house prices, and the housing market has a very strong impact on consumer spending,” he said. “We’ve already seen consumer spending slow in line with the housing market, we’re now seeing consumer confidence come off and I think you’ll see more of that in 2018.”
The big unknown is if and when the government’s increased spending, such as higher welfare payments, will translate into stronger economic growth and inflation.
BNZ expects fiscal stimulus to kick in around the second quarter of 2018, and the Reserve Bank to start raising interest rates from a record low in the third. Investors see a 72 percent chance of a hike by the end of next year, but that’s down from 100 percent six weeks ago, and the bank itself doesn’t expect to start lifting rates before mid-2019.
Uncertainty over the economic outlook is just one of the challenges that Adrian Orr will face when he takes the helm of the RBNZ on March 27. The government’s planned reforms of the bank, including adding full employment to its job of price stability and restructuring its decision-making committee, could come into effect from the middle of the year.
©2017 Bloomberg L.P.