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Budget has hallmarks of treading water

Article by Make Lemonade NZ

Wellington – May 4, 2016

This year’s May 26 Budget has all the hallmarks of treading water, BERL chief economist Ganesh Nana says.

There will be strenuous efforts expended to make it look like something is being done; but, without the will to wish to do anything, Dr Nana says in BERL’s monthly economic monitor.

“With the accounts showing a borderline surplus or deficit, the chances of any significant tax relief will remain on the backburner. The shadow of the Auckland housing market imbalance spilling over to neighbouring regions will pepper the narrative and accompanying commentary.

“However, the will to comprehensively address the imbalance will remain absent. More likely will be further exhortations to local authorities to release land and relax planning constraints.

“Given the success in convincing most that our economic situation is sound and prospects are positive, it can be argued that a treading-water Budget is precisely what is needed.

“Alternatively, the chances of New Zealand escaping unscathed from a global economic slowdown are remote. In the context of such a faltering global economy the authorities will be wanting to keep its powder dry. Interestingly, the potential to loosen government spending as a means to counter any cyclical slowdown was signalled in late 2015.

“Of course, with interest rates at record lows (government 10-year borrowing rate below 2.5%), the argument to accelerate long-term public sector infrastructure investment spending to lift trend (as well as cyclical) growth also holds considerable merit. We suspect, such a move is unlikely.”

The report says residential construction consents signal busy activity in the sector. But recent months have seen a subtle shift as the Christchurch residential rebuild tapers and the Auckland surge spills over to neighbouring regions. Overall, the latest 3 months saw consents issued at 17 percent up on year-earlier levels. Topping this surge was Bay of Plenty, Otago (including Queenstown), and Waikato at over 50 percent increases.

Total new housing consents issued over the latest 12 months was close to 28,000 – the highest 12-month total since 2005. While residential building is set to continue surging, albeit with a changing regional composition, the picture for non-residential building activity remains more muted.

The slump in farm buildings is unsurprising, while the decline in social (schools, hospitals, community) buildings is at odds with the public sector building programme.

Dr Nana says in contrast to the global gloom, New Zealand retail spending seems to have found new and refreshed legs. With transactions surging at close to eight percent up on year-earlier levels, spending growth is now close to a five-year high. Moreover, with little price inflation to talk of, this growth rate represents a substantial increase in the volume of activity being experienced in the industry. Within the sector, hospitality activities are underpinning this surge – with the latest 3 months recording sales at more than 13 percent up on the same period a year earlier.

A surge in motor vehicle sales sees turnover at close to nine percent rise on year-earlier levels. Doubtless, the lift in spending in the hospitality sector is closely related to the surging activity in the tourism sector, he says.

“A reflection of the scale of this boost is provided by total guest night numbers. Over the past 12 months these have totalled nearly 37 million, or over five percent up on the previous year. The latest three months is even more impressive, at six and a half percent rise on year-earlier levels. These numbers are consistent with the surge in international visitors, as international guest nights for the latest 3 months over eight percent up on year-earlier levels.

“However, the domestic visitor is also contributing to the tourism sector buoyancy, with domestic guest nights nearly rising five percent. In terms of the domestic economy, confidence, presumably underpinned by employment growth, and feel-good house price factors, are clearly outweighing any external concerns. With close to a decade since the onset of the Global Financial Crisis, it is sobering indeed that the global recovery remains so fragile,” Dr Nana says.

For further information contact BERL chief economist Ganesh Nana on 021 137 6530 or Make Lemonade media specialist Kip Brook on 0275 030188.

Photo: BERL chief economist Ganesh Nana

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