New Zealand Country Risk Report Q4 2018
New Zealand's real GDP growth decelerated to 3.0% y-o-y and 1.1% q-o-q seasonally adjusted annualised in Q118, respectively (from 3.2% and 1.7% in Q417), and we are maintaining our 2018 real GDP growth forecast of 2.7%. Our expectations are informed by a weak housing market outlook dragging residential investment and subdued private consumption growth, despite support from the external sector and government spending.
We are now forecasting the RBNZ to not only hold its policy interest rate at 1.75% through 2018, but also in 2019, after taking into account the central bank's updated forward guidance during its August meeting. We expect the central bank to look to keep monetary conditions accommodative to spur higher inflation and to support a slowing economy.
Despite the gradual improvement since 2008, New Zealand's external accounts remain the economy's weak link and a persistent current account deficit poses risks of large-scale capital outflow. In order to correct these imbalances, domestic savings will need to rise sharply, which will undermine economic growth to some extent.
We are revising our 2018 average forecast for the New Zealand dollar to USD0.68/NZD (from USD0.72/NZD previously) due to bearish technicals and negative sentiment stemming from the market's dovish interpretation of the RBNZ's monetary policy stance and rising trade tensions. Our 2019 average forecast is now USD0.63/NZD from USD0.71/NZD previously and continues to reflect the unit's vulnerability to investment outflows from slowing growth and rising inflation.
Major Forecast Changes
We have revised the average exchange rate forecast for 2018 to USD0.78/NZD from USD0.72/NZD previously.
We now expect the RBNZ to only hike its policy interest rate in 2020, from 2019 previously.
Key RisksWe believe that there are two main risks facing the New Zealand economy:
Domestically, property prices could see a sharp decline and associated financial instability owing to the large levels of household debt in the economy and the banking sector's exposure to the mortgage market. The property market is overvalued from a nationwide perspective, but key cities such as Auckland are experiencing what appear to be bubble-like price advances, which left unchecked could create financial instability.
Externally, a sharper than expected decline in Chinese import demand could lead to further declines in dairy prices and export volumes, significantly reversing the enormously beneficial upturn seen in New Zealand's terms of trade over recent years. A collapse in Chinese demand could weigh further on New Zealand's dairy export prices.
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