There's growing risk that consumer confidence will follow business confidence lower, as economic conditions worsen, warns Infometrics.
In its latest quarterly outlook the independent economics group has revised down its growth path for the New Zealand economy.
"Households could go into their shells over the next year as economic conditions worsen, with little to support spending growth in the near-term," Infometrics says in its latest forecasts.
"The stagnating labour market and the potential for house prices to fall both threaten to drag consumer confidence further below its long-term average."
It forecasts GDP to stay below 3 per cent for the next five years and, after a wave of fiscal stimulus in 2021, it expects to see it fall as low as 1.4 per cent by 2022.
"Since late 2017, consumer confidence has held up better than business confidence, but households' income and wealth are now both under pressure," says Infometrics chief forecaster Gareth Kiernan.
"Firms' unwillingness to commit to capital expenditure is being matched by a lack of new hiring activity, with businesses uncertain about the global economic outlook and the effects of domestic policy changes.
"Meanwhile, Auckland's falling property prices could be replicated in other regions, as historically high levels of residential construction lead to an oversupply of housing."
It was difficult to be upbeat about the prospects for households, Kiernan said.
As well as the wealth effect of house price growth drying up he highlights weak employment growth.
The Household Labour Force Survey showed a 0.2 per cent decline in the number of people employed over the last six months.
"Year-end employment growth is at its weakest in three years, and we forecast that it will slip to a six-year low of 1.3 per cent before the end of 2019," Kiernan said.
Adding to the gloom, softness in the global economy was starting to become a reality and could push export returns down over the next 18 months.
Across five years Infometrics has actually revised its private consumption forecasts up, based largely on two factors - immigration and government spending.
"Our outlook for net migration and, consequently, population growth is higher. Recent migration data has been stronger than we had expected, given the Government's apparent policy efforts to pull migration lower," Kiernan says.
Secondly, following May's Budget, Infometrics expects government policy to have a more
stimulatory effect on household spending than it previously allowed for.
In particular, the Government's changes to the indexation of welfare benefits will boost the
spending ability of lower-income households.
However Infometrics warns that as the fiscal stimulus plays through, there will be little other impetus for growth in the medium term.
It picks GDP growth to pick up later this year, peaking at 2.9 per cent before falling through 2020 to 2.4 per cent to bottom out at 1.4 per cent in 2022.
With interest rates already at a record low the Reserve Bank's capacity to stimulate is greatly reduced, Kiernan says.
Infometrics says the Government's "environmental agenda and more expansive focus on wellbeing are also likely to contribute to weaker economic growth outcomes.
"We recognise that GDP growth has often been overplayed as the most important single
focus of government policy or society's advancement," Kiernan says.
"However, a lack of evaluation of government wellbeing spending being linked to actual advancement in outcomes could undermine actual progress, as could an inability to actually spend the funds needed to change lives."