Normally, one would see inflation rising along with economic growth. However, at present, many economic indicators point to slowing growth but inflation starting to rise. There is no doubt that the mix of economic activity is changing. Some sectors are cooling but we still have a continued base for economic growth with low interest rates, a lower NZ dollar and strong terms of trade.
Inflation is rising and this could cause issues in the next few years. The New Zealand economy and markets seem at a crossroads.
What is leading to a slowdown?
- Inflation is rising due to wage demands, a shortage of skilled labour, and the rising cost of imported goods (due to lower NZ dollar);
- Falling business confidence is resulting in businesses deciding to spend less;
- Construction capacity constraints;
- Softening in the housing market;
- Reduced immigration;
- The government’s intention to run a balanced budget; and
- The NZ sharemarket being expensive and offshore investors looking to invest elsewhere.
What about the positive news?
- Interest rates for borrowers are still low and are likely to remain that way, according to the Reserve Bank, until 2020;
- The lower NZ dollar leads to stronger export earnings;
- Commodity prices are high; and
- Tourism is continuing to boom
What does this mean for your investments?
We are taking a more conservative approach with investment portfolios. Economic commentators are not predicting a correction in the near term, but we do believe that there will be more short-term ups and downs in the market. The sort of investment performance we have seen over the past eight years will not continue and we believe sharemarkets will need to adjust back to their long-term averages. We are focussing more on quality stocks and funds in order to build resilience into portfolios to handle the changing economic environment.