You are here

Construction holds back NZ growth in Q1, OECD calls for home loan limits

Friday, June 16, 2017 - 08:25

kvnz17.jpg
New Zealand's economy grew less than expected in the first quarter of 2017 after the first fall in construction output in two years, suggesting the economy could be poised for softer growth but with the housing market staying uncomfortably tight.

[WELLINGTON] New Zealand's economy grew less than expected in the first quarter of 2017 after the first fall in construction output in two years, suggesting the economy could be poised for softer growth but with the housing market staying uncomfortably tight.

As the Organization for Economic Cooperation and Development (OECD) praised New Zealand for its "enviable" robust growth, official data showed the economy expanding just 0.5 per cent in the first quarter, barely over half the central bank's forecast.

Construction activity fell for the first time since June 2015, highlighting how the shortage of skilled labour and other capacity constraints impede the country's ability to build houses fast enough to match record migration and contain soaring prices.

The OECD said high household debt levels were a concern, as it published its biennial country report, and called on authorities to add debt-to-income limits (DTI) on home loans to the "macro-prudential" policy toolkit.

sentifi.com

Market voices on:

The OECD saw the economy growing 3.1 per cent in 2017, in line with central bank forecasts, but said New Zealand needed to tackle labour productivity that lagged those of its OECD peers.

"I would say that the fact that we've had moderate GDP growth now for the last six months is a reminder to everyone not to take the New Zealand economic performance for granted,"Finance Minister Steven Joyce said at a news conference in Wellington, held with OECD Chief Economist Catherine Mann.

New Zealand has been among the fastest-growing economies in recent years but there is an increasing discrepancy between official forecasts and those of private economists who see capacity constraints retarding rapid growth.

Softer growth is seen as likely to add to the Reserve Bank of New Zealand's determination to keep interest rates at record lows for years, as it focuses on stoking inflation.

First-quarter growth was below the central bank's 0.9 per cent forecast and the 0.7 per cent forecast in a Reuters poll of economists. Annual growth was 2.5 percent, undershooting market expectations for a steady 2.7 per cent.

Construction fell 2.1 per cent in the first quarter but was still up 9.3 per cent on the year, reflecting the sector's strong growth in 2016, Statistics New Zealand said.

The New Zealand dollar fell to US$0.7246 from around US$0.7265 before the data, and was last at US$0.7218.

CONSTRUCTION DRAG The fall in construction activity comes at a time when New Zealand's housing market, which has soared more than 50 per cent in value in the last decade, has sparked fears that high mortgage debt could pose a systemic risk in the event of a sharp downturn in property prices.

Even though price growth has slowed in recent months, the RBNZ said in a consultation paper last week it saw "significant net benefits" in debt-to-income limits on home loans.

Finance Minister Steven Joyce said DTI limits needed to be examined closely because they demanded a tricky balancing act between supply and demand: "There's no free lunch in economics in that demand management tools can also soften supply responses."

OECD's Mann called on the New Zealand government to add DTI restrictions to its policy arsenal, but also urged officials to consider consequent costs and benefits, noting that while DTI limits could protect the most financially vulnerable they could also freeze low-income earners out of the housing market. "It needs to be in the toolkit," she said. "It seems that the banks themselves have started to look more carefully at some of these indicators whether or not it's required. Especially in an environment where interest rates in the global economy are probably on the rise, banks are making those judgements."

REUTERS

Nespresso
Pair your daily business read with the perfect cup of espresso.

Subscribe to The Business Times today to receive your very own Nespresso Inissia coffee machine worth $188.

Find out more at btsub.sg/btdeal

Powered by GET.comGetCom