NZ Growth Strong Despite Global Uncertainty

In spite of a backdrop of global uncertainty, the New Zealand economy has enjoyed an extended period of above-trend growth, with domestic GDP growth running at 3.4% in 2016. Whilst this is forecast to slow in 2017, it is still expected to stay strong by both historical and OECD standards.

The key drivers for domestic growth have been well (and often) documented. These include historically high net migration, strong construction activity, tourism and accommodative monetary policy, Yahoo reported.

Generally speaking, without investment, businesses start to face capacity constraints, which in turn hampers their ability to grow.

With this continued strong GDP growth, there is an expectation that the NZ economy will soon experience an uplift in business investment. This is where the banks have a critical role in providing credit for businesses that will fuel greater business sentiment and the necessary economic impulse.

Recently, however, the country has been seeing a divergence in banks’ deposit growth relative to credit growth. Put more simply, the banks are unable to sufficiently grow their domestic deposit base to fund the requisite credit growth, which puts some significant restrictions on future economic expansion.

Traditionally, banks have funded in offshore markets in order to fill this gap. However, the current cost of overseas funding has put pressure on banks’ own margins and hampered the banks’ ability to grow their own balance sheets.

In addition, major banks have their own funding pressures in the face of growing capital requirements demanded by the regulators. In a recent speech to the New Zealand Bankers’ Association, Reserve Bank Deputy Governor Grant Spencer stated that higher levels of capital for the banks would improve the soundness of the financial system. He did qualify this by suggesting that imposing capital requirements which are too high would provide a further drag for banks and in turn hamper their ability to provide capital for businesses to fund economic growth.

More restricted access to bank funding does have a flow-on effect on growth. “We don’t expect a tightening in monetary conditions any time soon and believe we have seen the lows in the current inflation cycle. Labor skill shortages should see upward pressure on wage growth but further growth in the domestic economy is going to require access to capital for businesses to drive growth, inflation and productivity in 2017. As always, in business and personal lives, the banks have a key role to play.”