12 Aug 2015

Bumpy road ahead for economy, says Westpac

9:17 am on 12 August 2015

One bank is predicting a bleaker outlook for New Zealand's economy as the impact of recent dramatic falls in dairy prices, and a slowdown in the Christchurch rebuild is felt.

Westpac Bank is predicting a bleaker outlook for the New Zealand economy.

Westpac Bank is predicting a bleaker outlook for the New Zealand economy. Photo: 123RF

In its latest quarterly economic review Westpac Bank expects gross domestic product (GDP) to fall to 1.6 percent by next year, unemployment to rise and wage growth to slow further.

Westpac chief economist Dominick Stephens told Morning Report the recent dairy price drop was "ferocious and unexpected".

"New Zealand reached 3.3 percent economic growth on the back of high dairy prices and the Christchurch rebuild underwriting growth for a number of years, and we've sort of gotten used to it."

Westpac Chief Economist, Dominick Stephens.

Westpac chief economist Dominick Stephens Photo: Wespac Bank

But he said sharply falling dairy prices and the rebuild in Christchurch peaking would damage confidence and so affect business investment and employment decisions.

He predicted that would bring GDP growth down in the short term to around 1.8 per cent and the unemployment rate to 6.5 percent.

Yesterday finance minister Bill English said lower interest rates and the exchange rate were balancing out dampening effects on the economy but he nevertheless expected the economy to slow from 3 percent growth to about 2 to 2.5 percent.

Mr Stephens said he had seen some worryingly weak business confidence surveys.

"We've actually had the biggest three-month fall in one business confidence survey in 15 years."

He said the slowing economy would create fewer jobs which would be a problem with the population growing strongly.

"It doesn't necessarily mean more people will lose their jobs, it just means the labour market will not be strong enough to absorb population growth which is very strong at the moment."

He described the recent slump in dairy prices as a big hit, which would not be so easily absorbed as previous price drops.

"The drop in dairy farmgate price from $8.40 two seasons ago to $4.40 last season, that was absorbable, farmers took it on their balance sheets.

"They took on more debt, they continued to spend in towns to some extent, I don't think there was a one-for-one impact on GDP from that initial down turn."

However, he said the most recent downturn represented "crossing the rubicon."

"Farm balance sheets are now a little more stretched and there is more of a one-for-one impact from falling dairy prices straight on to the economy."

The Chinese devaluation of their currency overnight added further pressure, he said.

"That effectively means the Kiwi has risen against the Yuan, it pushed the Kiwi down a little bit against the US dollar, but overall what this actually means is it makes it a little bit harder for our exporters to sell into China."

China is New Zealand's biggest export destination, he said, and the devaluation made Chinese exports to New Zealand cheaper.

Amid this softening economic situation there was a strong argument for more interest rate cuts, he said.

"I think there's plenty of scope for the Reserve Bank to reduce interest rates, the Chinese move overnight only reinforces that."

Meanwhile, higher fuel prices and waning consumer confidence were expected to dampen retail spending.

Official figures show spending using debit, credit and charge cards, rose a seasonally adjusted 0.4 percent in July, compared with the previous month.

Excluding fuel and car sales, core retail spending rose 0.5 percent with people spending more on clothing and footwear.

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