Westpac predicts three more OCR cuts this year

Ongoing price issues for the dairy sector and the peaking of the Canterbury rebuild mean New Zealand’s near-term growth outlook is no longer looking so rosy, states Westpac’s latest weekly commentary.

Westpac chief economist Dominick Stephens said last week’s fall in dairy prices, along with evidence of slowing reconstruction activity in Canterbury, have percolated through to New Zealand consumer and business sentiment.

In recent surveys, businesses’ expectations for their own activity fell sharply for the second month in a row, and the decline was concentrated among construction firms as well as farmers.

This own-activity measure tends to be a leading indicator for GDP growth, and signals a slower economy through mid-2015, Stephens said.

“In light of these developments – and the possibility that the current volatility on global markets will further depress confidence in the months ahead – we now expect three more OCR cuts this year.”

Westpac expects the Reserve Bank’s cuts will come in July, September and October and will take the OCR back down to 2.5%.

The plunging exchange rate, which will push up inflation, and the fact that Auckland’s housing market just continues to steam ahead did present an argument against more OCR cuts, Stephens continued.

“But these arguments are likely to count for relatively little to the RBNZ, which is under pressure to lift inflation towards 2%, is wary of further downside surprises to inflation, and has been dismissive of the inflation risks posed by rising house prices.”

In Stephens’ view, there is no question that the combination of a dairy downturn and a booming Auckland property market will see New Zealand’s financial imbalances widen.

While the country’s balance sheet has improved over recent years, the RBNZ’s latest credit figures show that New Zealand’s economic resilience is starting to erode.

Stephens said debt is now growing at a faster rate than nominal GDP - for both sensible reasons (dairy farmers accessing credit lines to get through bad times) and for more worrying ones (mortgage debt rising on the back of Auckland’s property market).

“It’s worth noting that much of the deleveraging of recent years has been on the corporate side – the ratio of household debt to household income is already back where it was in 2008.

“It is likely to rise further if house prices continue their upward trajectory.”

New Zealand’s saving grace is its floating exchange rate, Stephens said.

The weaker dollar has already helped to balance out the recent falls in dairy prices and likely further falls will cushion dairy farmers’ cash flow and provide a windfall for other agricultural exporters.