The New Zealand economy has just celebrated its seventh year of uninterrupted annual expansion, BERL chief economist Dr Ganesh Nana notes
On the back of strong population growth, in turn driven by unprecedented migration inflows, GDP has grown 18 per cent since 2010.
A commodity price boom initially helped dairy exports surge over this period, Nana explains.
But this driver has been replaced by tourism as the lead engine for the export sector over the past couple of years.
“Accompanying these drivers has been ongoing construction activity, as building and infrastructure investment spending strives to catch up on previous years of decline.”
The short-term scenario for growth is positive, as the migration and tourism drivers remain robust, Nana notes.
“However, the appetite for increased building and infrastructure spending may be less robust. Signs of higher interest rates and tighter credit conditions will see this appetite recede.
“The clamour for tax cuts to take priority on public sector funds will also inevitably impact on government spending on infrastructure.
“There are also signs that the house building cycle may have already peaked. Longer-term prospects are somewhat clouded, as a combination of external influences and internal pressures add increasing risk.
“External influences revolve around increasing protectionist sentiment, geo-political instability, a weak global economic recovery and a fragile financial sector.
“The latest OECD outlook notes key risks including housing valuations that are a matter of concern in some advanced economies, and a disconnect between financial valuations markets and real economic activity.
“The world’s economy is not in a happy space and New Zealand is not immune to any of these risks. Indeed, the disconnect between financial valuations and real economic activity sets the scene for an inevitable disruptive correction where we will not be able to escape the damage. The concern around housing valuations is in reality a subset of this financial market disconnect.”
Internal pressures are led by the elephant in the room – the household sector debt-to-income ratio surging to a historical high at close to 170 per cent.
In addition, the viability of ongoing growth based on rapid migration expansion is questionable Nana says.
New Zealand’s remarkable GDP growth figures hide the somewhat more sobering outcome that GDP per capita has risen only eight per cent since 2010.
“Bluntly, expansion has been purchased again by an artificial demand-side boost, with little evidence that New Zealand’s supply side is in any way more efficient, productive, or profitable.
“What we don’t know is will the tourism boom continue to ease gradually, or revert to double-digit growth?
“How much will the infrastructure rebuild around Kaikoura delay other infrastructure projects in the pipeline? Or, whether tax cuts will dominate the need for infrastructure spending?” Nana asks.
