Monday, 2 May 2016
The outlook for the New Zealand economy offers some big positives, and some big negatives, but overall Kiwis can anticipate growth of between 2 – 2.5 per cent in 2016, as well as a modest growth outlook for New Zealand shares.
AMP NZ Chief Economist, Bevan Graham, said the positives for New Zealand are a very strong population growth through net migration, strong consumer spending, robust construction activity and a tourism sector that’s going pretty well.
“On the other side of the equation we have low dairy prices which mean a low pay-out for farmers again this year. On balance overall, it might not be a great year for growth, but it’s not a bad one either – but obviously there will be sector differences coming through,” he said.
The New Zealand Reserve Bank cut interest rates again in March, and signalled another in the pipeline for the first half of 2016, which could take the Official Cash Rate (OCR) down to 2 per cent.
“There were a number of factors that contributed to that cut. The NZ dollar exchange rate has strengthened recently, we have very low inflation, concerns about global growth, falling inflation expectations, rising bank funding costs and the challenges facing the dairy industry.”
Bevan said that put all of those factors together, and you could say that the RBNZ has taken the path of least regret in deciding to cut again. It wasn’t guaranteed that they would do so, because on the other side they also have a mandate to maintain financial stability.
“Cutting interest rates too low may inflame the housing marketing in Auckland – which has recently strengthened and is spilling over into other regions like the Bay of Plenty and the Waikato. There are risks either side in cutting or not cutting, but on balance they decided it was prudent to cut, and that makes us more confident in the modest growth outlook for the New Zealand economy over this year,” said Bevan.
The New Zealand share market is one of the more fully valued markets around the world at the moment, and that’s why AMP has set a neutral asset allocation towards the NZ share market currently. “We think there is greater value in global shares – in both developed markets, and emerging markets. That’s where our overweight to growth assets is,” said Bevan.
He says that with the Kiwi share market getting closer to fully valued, what is important is continued earnings growth.
“So long as we are confident we will see that growth, especially in earnings, we will probably maintain that neutral position. Even with that modest growth outlook, New Zealand shares will still do better than bonds,” he said.
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