Goldman Sachs’ Tim Toohey and Andrew Boak have taken an axe to its forecasts for New Zealand interest rates, economic growth and Kiwi dollar in the second half of the 2015 , in a research note released yesterday.
Here’s updated forecasts from the pair.
“Last week we changed our view that the RBNZ would cut interest rates 50bps by calendar year end to a forecast of 100bps of easing over the same period and we placed our FX and GDP forecasts under review. Today we cut our GDP forecast for 2015 for NZ from 3.1% to 2.3% and we now forecast the NZ$/US$ to be 0.68, 0.64, 0.62 on a 3, 6 and 12-month view compared to our prior forecast of 0.72, 0.70, 0.68”.
So what’s lead to Goldman’s slashing forecasts for rates, growth and the the level of the Kiwi dollar: a widening income shock that will undermine net migration and consumer trends, two factors that helped underpin lofty growth levels seen in recent years.
“We make the case that the income shock currently enveloping the NZ economy will progressively impact the two strongest aspects of the NZ economy at present – the NZ consumer and NZ’s net migration rate. With respect to the NZ consumer, slower wages, declining confidence and weaker asset prices are all likely in the year ahead, in our view. This risks feeding back into business expectations in general and non-construction investment in particular, which has recently shown some signs of fragility. With respect to the NZ net migration rate we demonstrate how important the pace of NZ’s domestic demand growth is in influencing migration growth and how the path of NZ departures closely maps Australian domestic demand growth. On both counts it is likely that NZ’s net migration rate has peaked and a new source of impetus to demand will likely be needed via monetary policy”.
To counteract the slowdown in growth and weak inflationary pressures, Toohey and Boak expect the RBNZ to cut interest rates by 0.25% at its July, September or December policy meeting. Despite risks that the US Federal Reserve will delay lifting interest rates and expectations for for further easing from the RBNZ, the pair believe this will still materially lower the level of the New Zealand dollar.
At present the RBNZ’s overnight cash rate sits at 3.25% while the NZD/USD currently buys .6885.