Business leaders, economists fear NZ economy is slowing, leading survey shows

Thursday, 9 August 2018

Reserve Bank governor Adrian Orr will announce his decision on whether to change the official cash rate at 9am, a day after the bank's survey of expectations pointed to a slowdown in growth over the next two years.

A survey of business leaders and economists points to the economy slowing over the next two years.

On Wednesday the Reserve Bank's quarterly survey of expectations was released, a day ahead of the central bank's interest rate announcement, due at 9am. Governor Adrian Orr is widely expected to leave the benchmark official cash rate unchanged at 1.75 per cent.

Although the survey of expectations is most closely watched as a guide to inflation expectations, respondents became much more downbeat in answers to questions on expected future economic growth.

Asked how quickly the economy would be expanding in two years time, the respondents, made up of 'economists, business and industry leaders' predicted it would be 2.2 per cent, down from 2.7 per cent in the June survey.

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The survey also showed expectations for wage growth were little changed compared to three months ago.

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Economist Cameron Bagrie believes New Zealand's economic growth is well below the 3 per cent annual rate predicted by Treasury.

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According to Michael Reddell, a former Reserve Bank advisor who now writes about the economy at the Croaking Cassandra blog, it was the sharpest fall in the measure since 2009, when the New Zealand economy was in recession.

Reddell said it was concerning that expectations for growth in two years dropped by more than the prediction for in 12 months time, 'suggesting that whatever is influencing respondents isn't something they expect to dissipate quickly'.

While Reddell said the survey was inevitably a poor indicator when sudden changes in the economy were anticipated, as the Government could respond to shocks by spending more to stimulate the economy and the Reserve Bank could cut interest rates, he believed the central bank should be 'rattled' by the fall.

The only time the survey had fallen by more was in 1997, leading into the Asian financial crisis, and 2008 and 2009, during the global financial crisis.

'Large falls in the past have coincided with the two periods of worst economic outcomes in the last couple of decades,' Reddell wrote.

Former ANZ chief economist Cameron Bagrie said on Wednesday that he believed the economic growth was 'a long way' below the 3 per cent annual rate Treasury was predicting.

'I reckon the economy is running around 1.5-2 per cent at present,' Bagrie said in a post on Twitter, pointing out that every 1 percentage point of growth was worth $800 million a year in Government revenue.

Other results in the Reserve Bank survey were more positive, with unemployment expected to stay low and inflation expected to be barely 2 per cent in two years. Despite recent publicity around pay settlements and expectations of an increase in industrial action, expectations for wage growth were little changed compared to three months ago.

The survey took place in the second half of July, before the latest version of the ANZ business outlook survey was released, showing a continued drop in business confidence, and before former prime minister Sir John Key made much publicised comments warning of growing problems for the world economy.