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New Zealand Faces Internal Threats as Growth Slows

Economists say the economy will continue to lose momentum into 2018.Economists say the economy will continue to lose momentum into 2018.

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, Bloomberg reported.

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% 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% 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% against the greenback since the Sept. 23 election, will continue to fall in 2018. It forecasts the kiwi will drop to 63 US 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.

 

 

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