Economy more sluggish than expected - ASB

Economists are predicting the official cash rate (OCR) will fall even lower later this year, as the economy struggles to pick up pace.

It dropped to a record-low 1.5 percent last week, the Reserve Bank citing a slowdown in domestic growth thanks to lower immigration and the softening housing market.

But global trade is also cooling off, New Zealand is getting caught up in the wake of the US-China trade war and the "beyond woeful" Brexit situation, according to ASB chief economist Nick Tuffley.

"Our earlier hopes that the New Zealand economy would gain a bit of momentum are waning as annual GDP growth is forecast to slow to just 2.2 percent in June this year," he said on Friday.

"Demand in the economy appears to have softened across the board. Firms have been reporting poor trading activity since the second half of 2018, business investment growth has tapered off, and the construction sector is hitting capacity constraints. This loss of momentum is starting to impact on job creation."

Tuffley's prediction matches that made by ANZ in April, which also predicted a drop to 2.2 percent growth.

"We believe the economy will strengthen, it's just going to take longer than anticipated," said Tuffley.

Construction is hitting capacity limits, unemployment is low so firms are struggling to find suitable staff, and despite the spectre of a broad capital gains tax being neutralised by Prime Minister Jacinda Ardern, there remains some uncertainty around Government policies in the year ahead.

"Short of additional policy stimulus, it is difficult to identify catalysts that will achieve [faster growth]," said Tuffley.

"Capacity constraints mean that the construction sector can't flex much more, despite the strong pipeline of work. Fiscal policy is unlikely to shoulder any more of the load, given the Government's commitment to its debt target. The RBNZ is expected to continue to do much of the heavy lifting, which should keep interest rates historically low."

The one area keeping New Zealand's GDP growth respectable is agriculture, which has "translated to robust growth in associated industries".

He's predicting the OCR to drop again in August to 1.25 percent, and stay there for a few years.

"The timing of the next OCR move will depend on the tone of domestic data, the New Zealand dollar, and global developments, and may come later in 2019."

National finance spokesperson Amy Adams said it was further proof the economy is slowing.

"When the Government came to office economic growth was close to 4 percent a year. Now it's barely above 2 percent and most of that is just population growth."

Adams blamed "250-plus working groups and policy uncertainty, the impact of having discouraged foreign investment, difficulties in getting staff, higher labour costs and more union-friendly industrial relations laws".

Finance Minister Grant Robertson didn't respond to Newshub's request for comment.

Offshore influences

But the escalation of the US-China trade war won't help. Growth amongst our trading partners has dropped from 3.9 percent in September last year to 3.5 percent now, much of it driven by China's slowing growth - from 6.8 percent at the start of last year to 6.4 percent in the first quarter of 2019.

The US slapped US$200 billion of tariffs on Chinese goods in early May, and China responded with tariffs of its own, prompting the US to threaten an even bigger response - possibly up to US$300 billion of new tariffs, NPR reported.

"Global risks simply cannot explain such a large decline in such a short space of time, particularly given global risks are largely just that at this stage, risks," said Adams.

"The fact that our export earnings and terms of trade remain strong shows that it is not global conditions that are hurting us, it’s a domestic lack of confidence and capacity constraints."

"US-China trade tensions have escalated to DEFCON 1," said Tuffley. "It is still possible the world's two biggest economies do end up coming to an agreement. But right at this moment, it is hard to read."

And uncertaintly remains in the UK and EU, both important trading partners for New Zealand.

"After a farcical pantomime that even Monty Python wouldn't have the depth of imagination to script, the UK has been granted a Brexit extension until the end of October. That simply extends the period of uncertainty UK businesses have to contend with."

The Government will deliver its next Budget on May 30.