Govt plans, worker shortage and dip in dairy prices set to slow economy

Light Rail tram on Dominion Road artist impression for Auckland Transport - AT - picture supplied NZH

The New Zealand economy will slow this year as labour constraints, changes in government infrastructure investment and lower dairy prices bite, says a new report from economic research group Infometrics.

"Lower levels of business and consumer confidence could also negatively affect business investment and household spending during 2018," said Infometrics Chief Forecaster Gareth Kiernan.

Infometrics now sees GDP growth slowing through the year to 2.6 per cent by early 2019 - compared with earlier forecasts of accelerating growth.

Prior to this latest report Infometrics had been forecasting GDP growth averaging 3.4 per cent a year during 2018 and 2019.

While far from apocalyptic that could put New Zealand's growth track below that of global expectations of around 3.1 per cent this year which could have implications for investment and the New Zealand dollar.

A shortage of workers will continue to limit increases in residential construction activity over the next year, particularly in Auckland, Kiernan said.

"The city's housing shortage will persist well into next decade, although demand pressures will become less intense from 2019 onwards as Labour's migration policy changes lead to slower population growth."

Partly because of these policy changes, Infometrics forecasts that net migration will decline from its peak of over 72,000 last year to 21,000 by the end of 2021.

Kiernan argues the shift in focus from road to rail in the new Government's infrastructure investment plan would lengthen planning times and delay the economic impact.

"Although we expect this rail project to proceed in the medium-term, there will be a lack of spending in the short-term with projects such as Auckland's East West Link road being scrapped," Kiernan said.

Conditions for export growth also looked more difficult over the medium term, he said.

The average dairy farmer is comfortably back in profit territory, but this season's pay-outs will not be as strong as previously expected.

"The average dairy farmer is comfortably back in profit territory, but this season's pay-outs will not be as strong as previously expected.

"The stimulus from higher dairy incomes this year is likely to be muted, although high export prices for meat, horticultural and forestry exports will help boost provincial economies."

The tourism sector continued to grapple with capacity pressures, amid signs that growth in the Chinese market was waning, he said.

The foreign education sector was likely to contract significantly from 2019 as new rules around student visas came into play.

Infometrics revisions put it at the more pessimistic end of the spectrum for local forecasts.

XXX However, many of the major economics teams have still to revise their forecasts for the new year.

The RBNZ currently forecasts GDP growth of 3.8 per cent for the year but is expected to revise that down next week in its February Monetary Policy Statement.

Major bank forecasts currently range from Westpac's 2.6 per cent for annual GDP growth - in line with Infometrics - to ASB picking growth in excess of 4 per cent.