February 27, 2019

New Zealand Institute of Economic Research (Inc)
Media release 26 February 2019
Embargoed until 1am,Wednesday 27 February 2019
NZIER Quarterly Predictions, March 2019

The ongoing trade war between the US and China, slowing growth in the Chinese economy and uncertainty over how Brexit will play out is expected to weigh on export demand, as detailed in the latest NZIER Quarterly Predictions. “We now expect annual GDP growth to average around 2.7 percent over the next five years. While we have made a slight downward revision to the growth outlook, it still represents the longest stretch of growth experienced by the New Zealand economy since 1992”, said Principal Economist Christina Leung.

Positive factors underpin domestic demand

Business confidence has picked up, and businesses report improved demand in their own business. However, there remains some uncertainty over the effects of Government policy changes. Although the recommendations from the Tax Working Group have been announced, it will be April before the Government indicates which of the policies it will look to implement.

Easing in LVR restrictions will have effects on housing affordability

The Reserve Bank introduced LVR restrictions in October 2013 to bolster financial stability, and there have been subsequent adjustments to the policy. More recently, an easing in LVR restrictions included reduced deposit requirements for property investors.

Our economic modelling of the New Zealand housing market shows these recent changes will have different effects on households with different socioeconomic features. By accounting for household wealth levels, we find that the resultant increased demand from property investors from the easing in LVR restrictions will decrease housing affordability for the lower-income group and crowd out first home buyers.

We expect the OCR to be kept on hold until mid-2020

The Reserve Bank has indicated it expects to keep the OCR on hold until mid-2021, given the balance of risks it sees around the growth outlook. Inflation remains contained close to 2 percent, and economic growth is moderating. Offshore volatility is keeping the Reserve Bank cautious as to when it tightens monetary policy.
We expect the central bank to raise the OCR from mid-2020. Our expectations of an earlier start to the tightening cycle relative to the Reserve Bank’s reflects our expectation that inflation will pick up at a faster pace.

An independent take on the New Zealand economic outlook is available exclusively to NZIER’s members in the latest Quarterly Predictions.

For further information, please contact:
Christina Leung, Principal Economist & Head of Membership Services
christina.leung@nzier.org.nz, 021 992 985