The New Zealand economy is experiencing a gradual deleveragingcycle, which will weigh on real GDP growth over the coming years.
Slow construction activity will act as a drag on overall growth, eventhough investment in the dairy sector should improve modestly alongwith milk prices.
New Zealand's fiscal accounts remain in better health comparedwith most developed market economies. The New Zealand governmenthas a strong commitment in keeping expenditures in checkamid weak revenue collection, and we believe that it will continue tomaintain its budget surplus over the coming years, which is positivefor the business environment as the outlook for the private sectorwill continue to be healthy.
The Reserve Bank of New Zealand (RBNZ)'s attempts to maintain abalance between slowing the housing market and at the same timeraising inflationary pressures in the country, suggest that the OCRwill remain on hold at 1.75% for the remainder of 2017, before asmall 25bps increase by end-2018.
Despite the gradual improvement since 2008, New Zealand's externalaccounts remain the economy's weak link and a persistent currentaccount deficit poses risks of large-scale capital outflow. In orderto correct these imbalances, we will need to see domestic savingsrise sharply, while investment growth cools, which will undermineeconomic growth to some extent.
Our fundamental outlook for the New Zealand dollar, particularly intrade-weighted terms, is still for weakness over the coming quarters.
The currency remains expensive, and there is room for highlybullish speculative positioning to be pared back amid weakness inthe housing market.
We have downgraded our real GDP growth forecasts for 2017 and2018 to 2.6% in 2017 and 2.4% in 2018 (versus 3.1% and 2.6%previously) as construction activity will be negatively impacted bythe softening housing market, and a slowing services sector.
We have revised our 2017 average forecast to USD0.7000/NZDfrom USD0.6900/NZD previously to account for the outperformanceover the past couple of months. We have also upgraded our 2018average forecast to USD0.6900/NZD from USD0.6700/NZD. Despiteour upside revisions, we still expect depreciation over the comingyears.