New Zealand's economy is in a "productivity recession" and relies on migrant-fuelled population growth to expand while stocks are overvalued and investors should cut their holdings by about a quarter, says JBWere.

In an economic update on New Zealand, titled "Working Harder, not Smarter," the advisory firm says headline gross domestic product has continued "to print impressively" but GDP per hour worked has flatlined for five years and per-capita GDP is similar to Japan's.

"In the absence of productivity gains, our economy has relied on more people, working more hours," analysts at the firm said. "Net migration provides a conveyor belt of fresh labour, but it comes with attendant bottlenecks in housing and infrastructure. The profitability windfall for these sectors has not arrived, with earnings warnings from all the major listed construction companies this year."

The Reserve Bank's monetary policy statement today forecast that GDP growth accelerated to 0.9 per cent in the second quarter and continued at that pace in the third. It predicts growth to speed to 1 per cent in the fourth quarter and also in the first quarter of 2018. It sees annual growth picking up to 3.1 per cent in the March 2018 year and reaching 3.6 per cent in 2019, from 3 per cent in the 12 months ended March 31 this year. Still, it signalled no increase in interest rates for at least two years.


The S&P/NZX 50 Index has gained about 14 per cent this year and touched a record high of 7805.33 today. The local stock market is currently trading at about 20 times earnings, making it one of the most expensive in the world. They are trading at a 25 per cent premium over Australian and global stocks, it said. The house price-to-income ratio had been on a tear since 2010 and was now the highest in the OECD.

JBWere said having an economic growth model reliant "on pushing the capacity envelope can be prone to mishap". Record net migration is driving housing demand "but it has a boom-bust history," they said. "Unfortunately, our two other important cyclical drivers, tourism and dairy, can also evaporate at short notice." They said New Zealand's capacity pressures are "unprecedented", which was unsurprising in a productivity recession.

On asset prices, the firm said both house prices and stocks have risen to the extent that all possible good news has been built in.

"Irrespective of the election outcome, we are recommending clients reduce their exposure to the NZ equity market by about a quarter," they said. While JBWere doesn't expect a sudden correction, a plausible scenario was for "a long period of low returns - less than 5 per cent."

"Listed companies don't appear to be thriving in the productivity recession, and market-wide earnings growth has tailed off," the analysts said. "Looking from the macro backdrop to valuations, to earnings, the decision to reduce our NZ equity holdings is not a difficult one."

The construction sector "epitomises the dilemma we face as investors," they said.

"In the midst of a building boom, construction has been a tough sector to own, with profit warnings in all of the major listed companies. This underlines the trade-off of an economy that has the needle in the red. Volume growth is impressive, but profitability actually becomes harder to find."