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Home / Business / Economy / Official Cash Rate

NZ in new 'borrow and spend' mode - Westpac

NZ Herald
16 May, 2016 10:45 PM2 mins to read

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The current phase of solid economic growth is tipped by Westpac Bank economists to last till 2018. Photo / Robert Trathen

The current phase of solid economic growth is tipped by Westpac Bank economists to last till 2018. Photo / Robert Trathen

New Zealand has entered a new debt-fuelled phase of economic growth, say Westpac Bank economists, with home owners borrowing against their properties to spend up.

"Households have thrown caution to the wind, and a 'borrow and spend' dynamic has emerged among rising house prices," said chief economist Dominick Stephens in the bank's latest Quarterly Economic Review.

He expected the current phase to continue for "another year or two" - which should mean reasonable economic growth - though not as strong as that last seen in 2014.

"But debt-fuelled growth is not sustainable. For that matter, neither is the Canterbury rebuild or rapid population growth, both of which we expect to taper off. "

New Zealand's economy is then likely to enter a phase of slower GDP growth, beginning around 2018, said Stephens. "At that time, we would expect to see interest rates and the exchange rate falling, while house prices stagnate or fall".

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Westpac expects the economy to grow by 2.7 per cent this year and 2.6 per cent in 2017.

"While those are healthy rates of growth, they mask a mixed outlook across the economy. Regions that are closely linked to the dairying sector and a number of other commodity exports are experiencing subdued growth," said Stephens.

"But at the same time, the combination of low interest rates, strengthening housing markets, and strong population growth are providing a powerful boost to economic activity through other parts of the economy."

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Strength in the housing market had seen New Zealand go into 'borrow and spend' mode, said Stephens. "This meant home owners were tending to spend more of the windfall they perceived when the value of their house rose, while aspiring buyers must borrow more."

The net effect of this was an increase in both borrowing and spending.

Read Westpac's latest Quarterly Economic Overview here:

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