Chris Tennent-Brown, CBA Economist, looks at the New Zealand economy for 2008 and advises what we can expect over the coming year. 

Economic growth will feel the strain
Economic growth is expected to lose some momentum over 2008 under the weight of New Zealand’s higher interest rates and the associated slowing housing market. We expect Gross Domestic Product (“GDP”) growth to slow towards an annual average of 2% from 3% in 2007.

Dairy industry to provide a boost
A feature of 2008 will be a pick-up on dairy earnings, which will kick in from mid-year. Consequently, we expect to see rural, particularly dairy, regions to outperform cities this year. Forecast dairy earnings in the year ending May 2008 will be the equivalent to 5.3% of GDP. This is up 50% from the previous year. The earnings in 2009 for the dairy industry are also likely to be around 5% of GDP.

Election in late 2008
New Zealand’s general election will occur in late 2008. Both main political parties are now foreshadowing tax cuts. Although the timing of any tax cuts is unknown, consumer spending is likely to increase as a result. The Reserve Bank of New Zealand’s (“RBNZ”) assumption of a $1.5 billion tax cut reflects the possible size of the cuts.

New Zealand inflation pressures remain intense
New Zealand inflation pressures will remain intense in 2008 largely due to ongoing capacity constraints. The labour market is the key constraint, with the unemployment rate at a two-decade low of 3.5%. A strong labour market, and the related job security and wage growth, has been a cornerstone of consumer confidence and strong household spending over the last few years. This will likely continue through 2008, although consumption growth is expected to moderate as the impact of higher interest rates bite.

Housing-related inflation has also been significant over the past 5 years. Combined with increasing petrol and food prices, inflation will be above the 3% target ceiling in 2008, having breached this target in the last quarter of 2007. 

Financial markets volatility to continue
The New Zealand dollar (“NZD”) volatility is expected to continue, driven by swings in global risk appetites. The NZD is likely to trade this year around values, which are well above long term averages. Interest rates will remain high over 2008; the risk in short term skewed to higher rates. The RBNZ will be watching the extent to which weaker export demand from New Zealand’s trading partners will reduce New Zealand’s overall inflation pressures. We expect the RBNZ to keep the current Official Cash Rate over 2008 and longer if the global situation leaves New Zealand largely unscathed.

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