Westpac economists have slashed their 2020 annual GDP forecast from 3.1 per cent to 2.3 per cent, and they expect unemployment will rise over the coming months.

Adjusting for population changes, annual per capita GDP growth is now just 1.1 per cent, its slowest pace in eight years, Westpac chief economist Dominick Stephens writes in his latest Economic Overview.

"We expect the situation to get worse before it gets better, as the escalating US-China trade war makes its mark on global economic growth," Stephens said.

He had expected to see the economy turning around from mid-2019 due to low interest rates and increases in Government spending.

"Instead, activity has remained subdued, with recent indicators pointing to quarterly GDP
growth of only around 0.5 per cent through the second half of 2019."

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The big change was the deteriorating state of the global economy - due largely to the United States/China trade war - which was now starting to be felt in key New Zealand exports such as milk prices, log prices and international visitor numbers.

While the labour market had been resilient to date (with unemployment falling to 3.9 per cent in June) hiring intentions were faltering, Stephens said.

Westpac forecasts it will rise to 4.2 per cent by the end of the year, with annual GDP bottoming out at 2.1 per cent for 2019.

Stephens said he remained confident the anticipated recovery would kick in through 2020 with growth rising to 2.7 per cent in 2021.

But he raised concerns about its sustainability and the risk of another asset bubble.

"The Reserve Bank is riding to the rescue, and we argue that it will be effective," he said.

"Mortgage rates have tumbled, and if further stimulus is required the Reserve Bank has options such as quantitative easing."

He expected lower rates would "spur asset prices, including an acceleration in house price inflation from around 1 per cent now to 7 per cent next year."

Combined with expanded government spending, that would shore up GDP growth, he said.

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But propping up growth in this manner deepened the longer-term risks in the economy.

"New Zealand is locked in a cycle of economic growth driven by ever-lower interest rates causing ever-higher asset prices, facilitated by ever-increasing household debt. This cycle can't last forever, and when it ends things could turn ugly."