Confidence in economy may have bounced ahead too far, says Infometrics

Tuesday, 28 January 2020

Consumers may be feeling more confident, but a long stretch of mediocrity beckons, Infometrics says.

The rebound in consumer confidence over the past few months may have gone too far and there is little reason to feel more upbeat about the country's economic prospects, economist Infometrics says.

Chief forecaster Gareth Kiernan said in an update that Infometrics expected growth to regain some momentum over the next year, with GDP growth climbing to 2.7 per cent in the year to March next year.

But it believed nothing had changed to help the economy avoid 'mediocre results' beyond 2021, forecasting GDP growth would then slip back to an average of less than 2 per cent between 2021 and 2024.

Infometrics' report did not attempt to factor in any fall-out from the Wuhan coronavirus outbreak in China that has rattled global markets, with Kiernan saying it was too soon to attempt to assess its effects.

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US shares experienced their biggest one-day fall in three months when trading closed on Tuesday morning, New Zealand time, with the Dow Jones industrial average down almost 1.6 per cent and shares on the technology-rich Nasdaq index down 1.9 per cent.

The NZX 50 index was down 0.8 per cent in mid-afternoon trading on what also appeared to be virus-related concerns.

ANZ warned that the Wuhan coronavirus was a 'new and potentially devastating addition' to global economic risks.

The bank cautioned against too many comparisons with the Sars virus, which academic studies estimated knocked only 0.08 per cent off New Zealand's GDP during its outbreak in 2003.

ANZ said the impact of Sars turned out to be not as bad as feared but the Wuhan coronavirus was quite a different virus that was 'on early evidence, not nearly as lethal, but much more easily spread'.

New Zealand's economic exposure to China was also much greater now, ANZ said.

Kiernan said consumers were feeling happier 'thanks to a little more wage growth and signs of a recovery in the housing market, particularly in Auckland'.

But both phenomenon had a flipside, Infometrics warned.

'Renewed property price rises are symptomatic of a sustained housing shortage, while slowing growth in job numbers means there is no assurance that workers' income growth will continue.'

A stuttering global economy, slowing population growth and falling house prices were all shaping up as real concerns hanging over the medium-term outlook, Kiernan said.

'In our view, New Zealand's potential for growth will also be hampered by more difficult conditions for exporters and an inability across the wider economy to achieve productivity growth of any magnitude.

'There just doesn't appear to be anything on the horizon to support renewed strength in economic growth anytime soon, with New Zealand's softer growth looking like the new norm,' he said.