Economic Rapid escalation - August 2021 - Westpac

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Economic Rapid escalation - August 2021 - Westpac
Economic
Overview.
Rapid escalation.
August 2021
Economic Rapid escalation - August 2021 - Westpac
Economic Overview August 2021.
New Zealand economy                                                                                                                       01
Global economy                                                                                                                            04
Inflation and the RBNZ                                                                                                                    06
Agricultural outlook                                                                                                                      08
Exchange rates                                                                                                                            09
Special topic: Life after vaccination                                                                                                     10
Economic and financial forecasts                                                                                                          11
The economy in six charts                                                                                                                 12

Contributing authors
Michael Gordon                         Satish Ranchhod     Nathan Penny                  Paul Clark                   Gregorius Steven
Acting Chief Economist                 Senior Economist    Senior Agri Economist         Industry Economist           Economist
  +64 9 336 5670                         +64 9 336 5668      +64 9 348 9114                +64 9 336 5656               +64 9 367 3978

Note from Michael.
Our forecasts have been through some rapid changes since our May Economic Overview, as the New Zealand economy has revealed
new facets to its post-Covid recovery. While our most regular readers won’t be too surprised by what they find here, it’s nonetheless
a welcome chance to catch our breath and take stock of the landscape.

We’ve noted for some time that Covid-19 has been constraining the supply side of the economy. That’s included rising prices for
materials, disruptions to global manufacturing and shipping, and the loss of access to migrant workers due to the border closure.

What was lacking, even up until a few months ago, was a sense that businesses were able to pass on cost increases, or to bid up pay
rates to attract local workers. But that’s changed in a big way. It’s now clear that demand is running hot as well, and that means the
stimulus the Reserve Bank provided last year to support the recovery is no longer needed.

We expect the Reserve Bank to begin raising the OCR from its record low over the coming months. That would put it well ahead of its
overseas peers, but that’s a fair reflection of the unique circumstances that New Zealand faces. Our Covid elimination approach has
allowed the economy to gather a head of steam, more so than we’ve seen elsewhere.

As we release this, I will have just had my first Covid jab. Mass vaccination is going to be crucial to the quality of life that we can
enjoy in the coming years. But as the more contagious Delta variant grips the world, it’s clear that the battle won’t end there.
Our special topic looks at the additional measures we may need to consider here, based on what’s emerging overseas.

Michael Gordon - Acting Chief Economist

Text finalised 13 August 2021
ISSN 1176-1598 (Print)
ISSN 2253-2897 (Online)
For address changes contact: WNZResearch@westpac.co.nz
New Zealand economy.
Well, that escalated quickly.

The New Zealand economy has been charging ahead and has built up a head of steam. However,
the rapid turnaround in activity over the past year has left the economy grappling with significant
growing pains. At the same time, we are still wrestling with Covid-related headwinds.

The New Zealand economy has surpassed all expectations                                     Of course, there are still some soft spots. Most notably, the
in recent months, with domestic activity growing in leaps                                  continued closure of our borders has meant that spending
and bounds. The economy powered through summer even                                        in sectors like travel, accommodation and entertainment
without the usual peak in tourists, and it looks to have gained                            still remains someway below pre-Covid levels. This has also
further momentum on top of that. There has also been a much                                meant that the recovery has been uneven across regions:
faster than expected tightening in the labour market, with                                 international tourist hotspots like Queenstown have lagged
unemployment dropping to just 4% in the June quarter, equal                                regions which have a larger agricultural backbone and those
to the cycle low that we saw in 2019.                                                      that focus on providing services for the domestic economy.

Figure 1: Economic activity by sector, June years                                          Overdrive.
      Annual average % change                         Annual average % change
 25                                                                                  25    The economy is set to continue growing at a brisk pace
          2018       2019        2020      2021(f)                                         over the coming year, with businesses in the construction,
 20                                                                                  20
                                                                                           manufacturing and services sectors all reporting solid levels of
 15                                                                                  15
                                                                                           forward orders. The continuing, albeit tenuous recovery in the
 10                                                                                  10    global economy also bodes favourably for export earnings.
  5                                                                                  5

  0                                                                                  0

 -5                                                                                  -5    The extraordinary amount of stimulus
                                                                                           rolled out following last year’s
      Source:
-10   Stats NZ,                                                                      -10
      Westpac
-15                                                                                  -15
          GDP
      (production)
                     Household
                      spending
                                  Residential
                                  construction
                                                  Business
                                                 investment
                                                              Government
                                                               spending
                                                                           Exports
                                                                                           lockdown is still flowing through the
                                                                                           economy’s veins.
Our strong economic performance over the past year owes
much to the fact that we’ve been able to effectively eliminate
Covid on our shores and keep it out. That’s allowed local                                  Reinforcing this firm outlook for demand, fiscal spending
households and businesses to operate largely free from                                     over the coming years is likely to be even higher than was
restrictions. At the same time, the extraordinary amount of                                assumed in the most recent Budget. The strength in economic
monetary and fiscal stimulus that was rolled out last year                                 conditions has meant that, despite the large increases in
when the nation was in lockdown is still flowing through                                   spending over the past year, the fiscal accounts are in much
the economy’s veins. Combined, these conditions have                                       better shape than had been expected. That’s giving the
supercharged domestic demand: household spending has                                       Government greater scope to pursue its social objectives,
surged, construction is booming, and across the business                                   while still remaining on course to achieve its debt targets.
sector there has been a lift in trading activity, along with                               We expect the next few years will see increased spending on
increases in plans for capex and hiring.                                                   wages and salaries in the public sector, as well as on social
                                                                                           support measures. The Government could also increase its
And it’s not just domestically focused industries that are                                 capital spending programme, adding to the large amount of
showing strength. As discussed in the Agricultural outlook                                 infrastructure spending that is already planned.
section, we’re also seeing firm demand for our key commodity
exports, with export prices up 24% over the past year. Some                                With demand running hot, the spare capacity that developed
of the resulting lift in farm and orchard incomes is being                                 in the wake of last year’s outbreak has been absorbed and
used for debt repayment. But we’re also seeing increases in                                signs that the economy is running hot are widespread. Wages
spending in the regions, along with a lift in rural land sales.                            and costs of production have been rising. Combined with firm

                                                                                                                                 Economic Overview August 2021 | 01
demand, that has resulted in a significant lift in consumer                                        substantially lower than those we saw over the past decade,
       price inflation to 3.3%, with a further rise expected over the                                     with the Government having signalled its intention to tighten
       coming year. We’re also seeing supply bottlenecks delaying                                         entry requirements over time. As a result, we now expect
       activity in a number of industries, including construction                                         that the strength in demand will see unemployment fall to
       and retailing.                                                                                     3.5% by the middle of next year – its lowest level in more than
                                                                                                          a decade. We also expect annual wage inflation will rise to
                                                                                                          2.7%, with larger increases for many in-demand occupations.
       Figure 2: Government consumption share of GDP
              % of GDP                                                              % of GDP              One of the other significant challenges that businesses
        24     Labour         National               Labour           National          Labour
                                                                                                    24    have been wrestling with are ongoing disruptions to global
              1984-1990      1990-1999              1999-2008        2008-2017           2017-
        23                                                                                          23    shipping and supply chains. That’s resulted in deliveries of raw
        22                                                                                          22    materials failing to keep pace with orders in recent months.
                                                                                                          It’s also contributed to shortages of many consumer goods as
        21                                                                                          21
                                                                                                          household spending has picked up.
        20                                                                                          20

        19                                                                                          19    Disruptions to global manufacturing and shipping now look like
        18                                                                                          18
                                                                                                          they will be more persistent than previously anticipated. The
                                                                                        Westpac           spread of Covid and its variants continues to disrupt economic
        17                                                                              forecasts   17
               Source: Stats NZ, Westpac
                                                                                                          activity in many regions, particularly in Asian economies that
        16                                                                                          16    are major producers of finished consumer goods. At the same
          1987      1991         1995      1999    2003     2007   2011    2015     2019     2023
                                                                                                          time, demand is picking up in large economies like the US,
                                                                                                          and shipping companies have diverted capacity away from
       The challenge that businesses have most frequently                                                 New Zealand towards more profitable routes.
       highlighted is that it has become increasingly difficult to source
       the labour that they need. This has been a particular issue                                        The faster than expected turnaround in economic activity
       in relation to workers with specialised skills in sectors like                                     and emergence of strong inflation pressures means that the
       construction and IT. However, reports of labour shortages have                                     Reserve Bank can now start removing some of the stimulus it
       been widespread across industries, skill levels and regions.                                       introduced in the wake of last year’s lockdown. As discussed
                                                                                                          in the Inflation and the RBNZ section, we think that a series of
       Difficulties sourcing staff have been mounting ever since                                          interest rate hikes is on the cards over the coming years.
       the borders were closed last year. However, tightness in the
       labour market isn’t just a supply side issue. The strength in                                      Over time, increases in borrowing costs will slow the pace
       economic activity has seen the demand for workers surging,                                         of economic growth and dampen inflation. This will also
       with labour turnover rising sharply as employers have bid up                                       result in a change in the makeup of the economy through the
       wages to attract staff away from other firms.                                                      middle part of the decade: government spending will account
                                                                                                          for a larger share of activity, and private consumption and
                                                                                                          investment a smaller share.
       Figure 3: Proportion of businesses reporting a rise in staff
       turnover (past three months)
                                                                                                          Please keep your mask on at all times.
                Net %                                                                   Net %
        40                                                                                          40
                                                                                                          Despite the economy’s enviable run over recent months, the
        30                                                                                          30
                                                                                                          risks associated with Covid have not gone away. That point
        20                                                                                          20    was made very clearly in July, with the popping of the trans-
        10                                                                                          10    Tasman travel bubble.
         0                                                                                          0
                                                                                                          For New Zealand, the continued spread of Covid and its more
        -10                                                                                         -10   virulent variants has a number of important implications. First
        -20                                                                                         -20   is that border restrictions are now expected to remain in place
        -30                                                                                         -30
                                                                                                          for longer than previously assumed, with the suspension
                 Source: NZIER                                                                            of the trans-Tasman travel bubble potentially extending
        -40                                                                                         -40
           2000           2003      2006          2009      2012    2015         2018      2021
                                                                                                          well beyond the initial 8 weeks that’s been stipulated. More
                                                                                                          generally, widespread travel with other countries is unlikely
                                                                                                          to open before mid-2022. And even then, border openings are
       In response to the growing tightness in the labour market,                                         likely to be gradual and on a selected risk-based basis. As a
       the Government has made some changes to visa programmes                                            result, industries that are closely linked to the international
       for migrant workers who are already in the country and                                             border, like tourism and accommodation, are likely to face
       those coming as part of the Recognised Seasonal Employer                                           tough trading conditions for some time yet.
       programme. Even so, we won’t realistically see a material
       easing in labour shortages until the borders are reopened to                                       But it’s not just tourism and travel that will be affected by
       new skilled migrants, and that is still some way off. Even when                                    ongoing health concerns abroad. The flare up in infections
       the borders do reopen, migration levels are likely to remain                                       may mean that demand in some of our trading partner

02 | August 2021 Economic Overview
economies will take even longer to recover, adding to the            We expect that house prices will continue to rise over the
challenges for our exporters of manufactured goods.                  coming year, but that the pace of increase will slow as
                                                                     mortgage rates lift from their recent lows. Longer term,
The bigger question is what would happen if we had another           mortgage rates are set to continue rising, back towards more
outbreak onshore. Over the past year, we have had periods            average levels. After the recent period of very low mortgage
where the Alert Level was dialled up in some regions. While          rates, that’s likely to take some of the steam coming out of
that did cause some disruptions, economic activity has proven        the housing market. And combined with changes to the tax
to be fairly resilient, with increases in the Alert Level often      system, the middle part of the decade is likely to see some
resulting in spending being delayed, rather than cancelled.          modest price declines.

However, the Delta variant is proving to be more contagious
                                                                     Figure 4: House prices and household spending
and harder to contain. Should it arrive on our shores, this raises
the risk that health restrictions could be imposed for longer              Annual % change                                      Annual % change
                                                                     45                                                                                       15
or that they are stricter than during previous incidents. That             Source: QVNZ, Stats NZ, Westpac                                    Westpac
would risk major disruptions to economic conditions and the          35                                                                       forecasts
                                                                                                                                                              10
labour market. It would also raise the possibility that additional   25
monetary and fiscal stimulus could be (re)introduced.                15                                                                                       5
                                                                      5
                                                                                                                                                              0
The house always wins.                                                -5
                                                                     -15                                                                                      -5
The combination of record low interest rates and significant         -25         Per capita consumption spending (right axis)
increases in fiscal spending since the start of the pandemic                                                                                                  -10
                                                                     -35         House prices (left axis)
has given domestic demand a powerful boost. That’s been
                                                                     -45                                                                                      -15
seen particularly clearly in the household sector, with retail          1995          2000          2005        2010     2015        2020          2025
spending now running well above the levels that prevailed
prior to Covid-19. Recent months have seen notable strength
in spending on household durables, like furnishings and              The strength in house prices has also placed a rocket under
appliances. There has also been a pick-up in spending on             the residential construction sector. Dwelling consent issuance
activities such as hospitality and dining out (which fell sharply    has risen to record levels, and there is a very large pipeline of
following last year’s outbreak).                                     work planned over the coming years. Much of this work will
                                                                     be in Auckland, however homebuilding has been ramping up
Reinforcing the lift in households’ spending appetites               around the country.
has been the strength of the housing market. Record low
mortgage rates have boosted demand from both owner                   The pickup in construction activity now in train follows an
occupiers and investors, and house prices have risen more            extended period where home building failed to keep pace
than 30% over the past year. Gains have been widespread,             with population growth. But with the borders now closed, net
with particular strength in central North Island regions like        migration and population growth have plummeted. And with
Whanganui-Manawatu.                                                  the record amount of building that is occurring, the shortages
                                                                     of housing that developed in many parts of the country over
                                                                     the past decade are being eroded rapidly. Even when the
                                                                     borders do open, the physical balance between demand and
Home building is surging, and the                                    supply of housing is likely to look very different from what we
shortages that built up in recent years                              have seen for some time.

are now being rapidly eroded.                                        Figure 5: Building consents and population changes
                                                                                Number                                                    Number
                                                                     140000                                                                               70000
The rapid pace of house price gains has exacerbated concerns                          Population (annual change, left axis)       Westpac
                                                                                                                                  forecasts
about housing affordability and the risks for financial stability.   120000           Consents (annual, right axis)                                       60000

In response, the Reserve Bank has already tightened loan             100000      Source: Stats NZ, Westpac
                                                                                                                                                          50000
to value lending restrictions twice this year, and a further
                                                                      80000                                                                               40000
tightening has been proposed. In addition, the Government
has announced significant tax reforms that will erode the             60000                                                                               30000
incentives to invest in residential property.
                                                                      40000                                                                               20000

The above changes are expected to have a dampening impact             20000                                                                               10000
on the housing market over time. However, to date their impact
                                                                           0                                                                              0
has been limited, with prices continuing to rise at a brisk pace               2000        2005          2010     2015     2020         2025
in recent months. Notably, while investors have stepped back
from the market, owner-occupiers have filled the void.

                                                                                                                         Economic Overview August 2021 | 03
Global economy.
       The bumpy road to recovery.

       The more infectious Delta variant of Covid is expected to be a bump in the road for our major
       trading partners, but the underlying story is one of strengthening demand. Countries with higher
       vaccination rates and a trend towards re-opening have not been as affected. Some countries are
       seeing capacity pressures build as demand strengthens and some central banks have responded
       by becoming more hawkish.

       The spread of the more infectious Delta variant has changed        In contrast, the Delta variant has put a spanner in the works of
       our expectation for growth among New Zealand’s main                China, Australia, and neighbouring Southeast Asian countries’
       trading partners. On balance, we expect the Delta variant          elimination strategies. Cities and regions in many of these
       will prove to be a bump in the road to recovery, rather than       countries have returned to lockdown, and there has been
       signalling an outright change in trajectory for global growth.     a subsequent impact on economic activity and a lowering
       As a result, we have lowered some of our growth estimates          of growth forecasts. These events are in stark contrast to
       for 2021, but have offset those changes by lifting growth          2020 when countries in the region were held up as Covid
       over 2022.                                                         containment success stories.

                                                                          Despite a downgrade for growth in 2021 to 6.1% from 6.5%,
                                                                          the overall picture for the US has stayed relatively constant,
       The Delta variant is expected to be a                              and our forecast for growth in 2022 has been upgraded to
       bump in the road to recovery rather                                4.3% from 4.1% previously. Part of this is due to a similar story
                                                                          as Europe and the UK of higher vaccination rates and a change
       than signalling a change in trajectory.                            in strategy towards learning to live with Covid.

                                                                          Figure 7: Global GDP growth
       Looking across our main trading partner economies, growth
       projections for Europe and the UK have been revised higher               Annual average % change            Annual average % change
                                                                          12                                                                   12
       due to the easing of Covid restrictions and a lower likelihood     10
                                                                                            2018   2019   2020     2021(f)     2022(f)
                                                                                                                                               10
       of more stringent lockdowns in the future. This is because          8                                                                   8
       of high vaccination rates and a change in strategy towards          6                                                                   6
       learning to live with Covid, rather than elimination. European      4                                                                   4
       GDP growth has been upgraded to 4.5% (from 4.2%) and                2                                                                   2
       4.4% (from 4.0%) for 2020 and 2021 respectively.                    0                                                                   0
                                                                           -2                                                                  -2
                                                                           -4                                                                  -4
       Figure 6: Global Purchasing Manager Indices                         -6                                                                  -6
                                                                                 Source: IMF,
                                                                           -8    Stats NZ,                                                     -8
                                                                                 Westpac
             Index                                           Index
        60                                                           60   -10                                                                  -10
                                                                                New Zealand        US     Europe       China      Other Asia
        55                                                           55

        50                                                           50
                                                                          While it is still early days, the recent divergence between
        45                                                           45
                                                                          economies in the Western hemisphere and those in the Asia-
        40                  Manufacturing                            40   Pacific highlights the importance of effective vaccines and
        35                  Services                                 35   high vaccination rates, as well as the importance of strategies
        30                                                           30   for learning to manage Covid long term (we discuss this more
        25                                                           25
                                                                          in our Special topic).
             Source: Bloomberg, J.P. Morgan
        20                                                          20
        Aug 2018 Feb 2019 Aug 2019 Feb 2020 Aug 2020 Feb 2021 Aug 2021
                                                                          Financial markets have largely shrugged off the recent flare
                                                                          ups in Covid with long-term bond yields falling since the May
                                                                          Economic Overview. However, this doesn’t appear to be driven

04 | August 2021 Economic Overview
by a shift in monetary policy expectations, but rather growing                    High vaccination rates and a change of strategy towards
confidence that central banks will do what is needed to keep                      reopening has been supportive of the US labour market, and
inflation in check. This has been corroborated by the rise in                     this has helped boost incomes and demand in the economy.
short-term interest rates as central banks in some regions                        The combination of much stronger than anticipated demand
have begun to contemplate removing stimulus as demand has                         and continued supply constraints has put pressure on prices
picked up.                                                                        and wages. This strength has come from a strong consumer,
                                                                                  business investment, and residential investment.
Figure 8: 10-year government bond yields
                                                                                  Figure 9: Share of population who have received at least
        %                                                          %              one Covid-19 vaccine
2.00                                                                      2.00
               US            Germany
1.50           UK            Australia                                    1.50         %                                                             %
                                                                                  70                                                                     70
                                                                                       Source: Our World In Data
1.00                                                                      1.00    60                                                                     60

0.50                                                                      0.50    50                                                                     50

                                                                                  40                                                                     40
0.00                                                                      0.00
                                                                                  30                                                                     30
-0.50                                                                     -0.50
        Source: Bloomberg
                                                                                  20                                                                     20
-1.00                                                                     -1.00
   Apr 2020     Jul 2020    Oct 2020     Jan 2021   Apr 2021   Jul 2021           10                                                                     10

                                                                                   0                                                                     0
                                                                                         World             US      Europe   China   Australia   NZ
An important pivot came from the US Federal Reserve in their
June statement which hinted at tightening policy. As a result,
we’ve moved forward our expectations of the Fed reducing                          Another place where consumers have played a major role in
their bond buying programme and raising interest rates. This                      the recovery is China. Part of this has been a result of being
largely reflects the US growth story remaining intact.                            able to re-open quickly, which meant growth has picked
                                                                                  up sooner. As the world continues to open up, Chinese
Despite the reinstatement of lockdown restrictions, the                           consumers should see incomes rise as global trade increases.
RBA did not ease policy or delay their plan to reduce bond                        In addition, stronger than expected investment by the private
purchases in September. This contrasted with financial market                     sector highlights the confidence of businesses and the
expectations that the RBA would delay their reduction of bond                     financial sector in funding them. Measures of credit expansion
purchases. The RBA’s actions highlight their assumption that                      remain supportive and are around 2019 levels.
the recent lockdown is a bump in the road to recovery, rather
than a directional change for the economy.                                        Despite the strength of the Chinese economy since the initial
                                                                                  Covid outbreak in 2020, there remains the risk of further
                                                                                  sudden sharp lockdowns in China and neighbouring countries.
                                                                                  For example, Wuhan has gone back into lockdown as the
Central banks have been more hawkish                                              authorities try to contain the spread of Delta. Neighbouring
indicating their willingness to keep                                              countries like Indonesia have also returned to lockdown.
inflation at bay.                                                                 Australia, which had been a model for getting Covid under
                                                                                  control, has also recently returned to lockdown. As Australia
                                                                                  has one of the lowest vaccination rates, this highlights the
The ECB on the other hand has continued to signal that                            ongoing economic risk posed by Covid, especially given the
monetary policy will remain accommodative. They are                               more adverse impacts of the variants that have emerged.
concerned about derailing growth by tightening policy
too early. However, the Pandemic Emergency Purchase                               Prior to the outbreak of the Delta variant, the Australian
Programme, put in place when Covid emerged in 2020, is only                       economy was recovering firmly. The economy overall was
set to run until March 2022 and is not being renewed. As a                        facing capacity constraints which led to increased cost
result, we expect a reduction in the rate of purchases under                      pressures. Accommodative fiscal policy has supported
this programme in September.                                                      business investment and residential investment. Along
                                                                                  with strong consumption, this has led to a tightening
The Fed has shown greater confidence in the US economy,                           labour market.
forecasting unemployment to fall below its long run average
over the next two years. This signals that the labour market
is expected to tighten, which should lead to wage inflation.
This was an important development as wage inflation could
transmit into a feedback loop of a rise in general prices,
leading to sustained inflation.

                                                                                                                                Economic Overview August 2021 | 05
Inflation and the RBNZ.
       No regerts.

       Covid-related supply constraints are now being compounded by strong domestic demand, and
       recent price pressures could become more sustained if left unchecked. As a result, we expect the
       Reserve Bank to start removing policy stimulus over the coming months. That does carry risks, as
       the world continues to grapple with Covid. However, the Reserve Bank has judged that the risk of
       waiting too long is even greater.

       At the time of our last Economic Overview, there was no             Where price rises came through most consistently wasn’t in
       shortage of stories about firms facing rising cost pressures        the more import-heavy components, but in labour-intensive
       and difficulties in finding labour. What was missing, though,       services. That highlights the extent to which labour shortages
       was a sense that they were able to pass these costs on to their     and wage pressures have built up in recent months. It also
       customers, or that they were in a position to pay up to attract     represents a source of inflation that’s potentially more
       workers. Indeed, inflation remained subdued in the March            persistent and harder to dislodge.
       quarter, as did wage growth.
                                                                           Figure 11: Selected labour-intensive services in the CPI
       Since then the situation has changed rapidly. As we detail in
       the New Zealand economy section, domestic demand has                      %                                                                          %
                                                                           6                                                                                     6
       built up a real head of steam. It remains the case that some of                                                          Source: Stats NZ, Westpac
                                                                                                    Quarterly
       the sources of cost pressures (such rising commodity prices,        5
                                                                                                                       Includes dining out, clothing services,
                                                                                                                         household services, vehicle repairs,    5
       global supply chain disruptions and higher shipping costs)                                   Annual                     vet services and hairdressing

       are likely to be temporary, or at least non-repeating. But          4                                                                                     4
       when these kinds of supply-side factors run up against strong
                                                                           3                                                                                     3
       demand, they can provide the spark for a more sustained
       period of higher inflation – unless that is met by a central        2                                                                                     2
       bank response.
                                                                           1                                                                                     1
       This intersection of supply constraints and strong demand
       has been evident in the recent data. Consumer prices rose           0                                                                                     0
                                                                               2007   2009   2011      2013     2015     2017            2019            2021
       by 1.3% in the June quarter, lifting the annual inflation rate
       to 3.3%, the highest in a decade. There were some especially
       large contributions from a few categories, such as petrol and       We expect annual inflation to peak at 3.8% in the September
       newly-built homes. But the various measures of ‘core’ inflation     quarter this year, and to remain above 3% through to the early
       were also on the higher side of the Reserve Bank’s target.          part of next year. Some of that strength is due to base effects:
                                                                           the sharp rise in prices in the June quarter will boost the annual
       Figure 10: Consumer price inflation                                 rate for the coming year, just as the price falls during the Covid
                                                                           lockdown kept the annual rate low over the previous year.
           Annual %                                         Annual %
       6                                                               6
                                                          Westpac
                                                          forecasts
       5                                                               5
                                                                           We expect inflation to settle around
       4                                                               4
                                                                           the RBNZ’s target from late 2022 –
       3
                                       RBNZ target band
                                                                       3   conditional on higher interest rates.
       2                                                               2

       1                                                               1   As we move towards the end of 2022, we expect inflation to
       0
           Source: Stats NZ, Westpac
                                                              0
                                                                           settle around the 2% midpoint of the RBNZ’s target band,
        2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025             which itself would be a more sustained period of inflation
                                                                           than we’ve seen for some time. However, those forecasts are

06 | August 2021 Economic Overview
predicated on a rise in interest rates over the next few years;         there is nothing to stop the RBNZ from immediately reversing
in the absence of action by the RBNZ, there would be a greater          any rate hikes it had made. Again, the economic cost of a brief
risk of inflation expectations becoming unanchored, and a               period of higher interest rates would be minimal, and the
spiral of larger wage and price increases taking hold.                  ‘regret’ would largely be felt by the RBNZ itself in terms of the
                                                                        cost to its reputation.
In light of these risks, we’ve significantly brought forward
our forecasts of interest rate hikes since our last Economic            The RBNZ has already ended its Large-Scale Asset Purchase
Overview. We expect the RBNZ to increase the OCR by 25 basis            programme, almost a year ahead of plan. Ending the
points at each of the next three reviews in August, October and         programme itself didn’t amount to a meaningful tightening of
November, which would take the cash rate to 1% by the end               policy, as the pace of purchases had already been scaled back
of this year. (With the August review looming as we publish,            significantly over recent months. The RBNZ has suggested
we should note that our general view on the path of monetary            that its holdings of government bonds will continue to have an
policy doesn’t rest crucially on what happens on that date.)            easing effect on financial conditions even after the purchases
                                                                        have stopped. But we’re sceptical of this – even before the
Further ahead, we expect a more gradual series of hikes over            programme ended, there was little evidence that the yield
the next couple of years, with the OCR reaching a peak of               curve was being held down lower than normal relative to the
2% in late 2023. This is broadly in line with what the RBNZ             level of the OCR.
considers to be a ‘neutral’ level for the cash rate. At this stage
we don’t think it will be necessary to go above neutral in the          We expect that OCR hikes will be transmitted as normal
current cycle, but that will depend on how successful the               through to the longer-term interest rates faced by borrowers
upcoming hikes are in dampening demand pressures and                    and depositors. Mortgage rates for the most popular fixed
house prices.                                                           terms have already started to rise in anticipation, and we
                                                                        expect a typical two-year mortgage rate to reach about 4%
The speed at which market opinion has turned towards                    by the end of next year. That would take them back to where
imminent OCR hikes has raised a few eyebrows. Hiking now                they were in early 2019 – not too onerous for most existing
would put the RBNZ far ahead of its peers – we expect the US            borrowers, but high enough to substantially change the
Federal Reserve to hold off until late 2022, and the Reserve            arithmetic for future house purchases compared to what
Bank of Australia until early 2023. What’s more, the world              we’ve seen in the last year or so.
economy is still grappling with newer and more dangerous
variants of Covid-19. And if an outbreak were to happen here,
                                                                        Figure 12: OCR and two-year mortgage rate forecasts
while our level of vaccination is still low, it’s likely that we’d be
plunged back into a strict lockdown.                                        %                                                                         %
                                                                        8                           OCR                                                     8
                                                                                                                                       Westpac
                                                                                                                                       forecasts
Indeed, we were surprised by the RBNZ’s hawkish turn at its             7                           Two-year fixed mortgage rate                            7
July monetary policy review. Since the onset of Covid, the              6                                                                                   6
RBNZ has described its policy decisions in terms of a ‘least
                                                                        5                                                                                   5
regrets’ framework. Initially, that meant doing everything
that it could to support the economy’s recovery; earlier this           4                                                                                   4

year, it meant waiting until it was certain that inflation and          3                                                                                   3
employment were on track before tightening. But by July signs           2                                                                                   2
of a faster than expected pickup in demand were widespread.
                                                                        1                                                                                   1
As a result, the RBNZ concluded that the risk of waiting                    Source: RBNZ, Westpac

too long, and letting inflation pressures get out of hand,              0                                                                                   0
                                                                         2010     2012         2014       2016    2018       2020     2022         2024
outweighed the risk of another Covid shock in the near term.

                                                                        Financial market forecasts (end of quarter)
The RBNZ has concluded that the risks
                                                                                           CPI                      90-day          2 year         5 year
of waiting too long to deal with inflation                                              inflation
                                                                                                          OCR
                                                                                                                     bill           swap           swap

outweigh the risks of another Covid                                     Sep-21              3.8           0.50        0.90           1.30           1.60

shock in the near term.                                                 Dec-21              3.4           1.00        1.10           1.40           1.75
                                                                        Mar-22              3.2           1.00        1.20           1.50           1.90
                                                                        Jun-22              2.3           1.25        1.35           1.60           2.00

The difficulty with a ‘least regrets’ approach is that it’s             Sep-22              1.9           1.25        1.45           1.70           2.10
subjective; two reasonable people can come to opposite                  Dec-22              2.1           1.50        1.60           1.80           2.20
conclusions. On the one hand, waiting a few months would                Mar-23              2.0           1.50        1.70           1.90           2.30
make little difference in terms of economic outcomes, but it
                                                                        Jun-23              1.8           1.75        1.85          2.00            2.40
would make a big difference in terms of our vaccination rate
and our ability to deal with a Covid outbreak. On the other             Sep-23              1.8           1.75        1.95           2.10           2.50
hand, if New Zealand were forced into a Covid lockdown,                 Dec-23              1.9           2.00        2.10           2.15           2.55

                                                                                                                         Economic Overview August 2021 | 07
Agricultural outlook.
       Passing the baton.

       Overall, agricultural commodity prices are at record highs. However, the price baton is passing
       between export sectors as the global economic recovery gathers steam. In short, we believe that
       it’s the meat sector’s turn to shine.

       Commodity prices hit fresh record highs in each month from                             Dairy farmers have thus had time to respond to improved
       March through June, and were higher again in July with the                             prices. New Zealand autumn production was massive. For the
       exception of dairy.                                                                    three months to May, production jumped a whopping 10%
                                                                                              on the same three months a year ago. This massive increase
       We are now seeing the price baton passing between export                               in supply explains most of the price correction. And with this
       sectors, with the prices for some premium products heating                             price fall coming earlier than we expected, we have trimmed
       up as the global recovery gathers steam. Notably, the exports                          our 2021/22 farmgate milk price forecast down to $7.75/kg.
       that rely on food service outlets are receiving a boost as more
       people get vaccinated and then return to restaurants, pubs                             Forestry prices have also been hot, setting a record high in
       and cafes.                                                                             June. This strength has been due to a combination of surging
                                                                                              Chinese demand and tight supply, including the Chinese ban on
       As such, we think it’s the meat sector’s turn to shine. In                             Australian timber. However, high shipping costs are eating into
       August, (prime) beef and lamb prices cracked $6.00/kg                                  returns, and we expect little relief on this front in the short-term.
       and $9.00/kg, respectively. Similarly, venison prices have
       jumped nearly $0.70/kg since May, while fine wool prices have                          Horticulture also continues to benefit from very high prices.
       bounced back to pre-Covid levels. Over the rest of 2021, we                            However, kiwifruit supply is lifting strongly, and prices have
       expect overall meat and wool prices to make further gains,                             eased a touch. While apple prices are holding up better, on
       with beef and lamb prices set to hit record highs.                                     balance, we expect horticulture prices to drift lower from here.

       Meanwhile, dairy commodity prices are taking a back seat.                              Over the coming months, we expect commodity prices to
       Overall dairy auction prices have now fallen for eight auctions                        recede from their record highs, as lower dairy prices offset
       in a row. Although, recall that dairy prices recovered from                            strength elsewhere. From 2022, we expect to see a more
       their Covid hit early, with prices surging by over 40% in late                         uniform agricultural supply response and for overall prices to
       2020 and early 2021.                                                                   moderate. However, despite this moderation, prices are set to
                                                                                              remain historically high through 2022.

       Commodity price monitor

                                                                                                                                                              Next 6
        Sector              Trend                                                                                                           Current level 1
                                                                                                                                                              months
                            Strong New Zealand production and Delta variant concerns have put a dent in high global dairy prices. We’ve
        Dairy                                                                                                                               Above average
                            trimmed our 2021/22 forecast to $7.75/kg.

                            Prices are on the up and with more and more people vaccinated we expect that global beef demand will rise,
        Beef                                                                                                                                   Average
                            with prices likely to set record highs.

                            With more and more people vaccinated, we expect global lamb demand to rise further. With lamb prices
        Lamb/Mutton                                                                                                                              High
                            already at $9.00/kg, $9.50/kg is in sight.

                            Prices have steadily increased this year. However, high shipping costs are eating into returns, and we expect
        Forestry                                                                                                                                 High
                            little relief on this front in the short-term.

                            To date, kiwifruit prices have eased on extra supply, but remain very high. With a smaller crop, apple prices
        Horticulture                                                                                                                             High
                            are holding up at very healthy levels.

                            Prices have turned up decisively on improved global demand. Fine wools have jumped back to pre-Covid
        Wool                                                                                                                                     Low
                            levels and coarse wool prices are lifting too.

       1 NZ dollar prices adjusted for inflation, deviation from 10 year average.

08 | August 2021 Economic Overview
Exchange rates.
Fundamentals will come to bear.

The New Zealand dollar has faced headwinds in recent months, but this is expected to reverse
in the near term. Strong economic fundamentals are leading to capacity pressures, and a more
hawkish RBNZ provides upside risk for the currency. Interest rate differentials and commodity
prices are also expected to be supportive of the kiwi.

The New Zealand dollar has drifted lower since the May             has already tightened some aspects of monetary policy, and is
Economic Overview. Most of the fall has been due to a strong       expected to increase interest rates in the next few reviews.
US dollar, which has appreciated by about 3% against global
currencies. The rebounding US economy has underpinned USD          Despite the re-emergence of Covid in Australia, the AUD
strength, cemented by signals from the US Federal Reserve          hasn't had a sharp depreciation against most currencies.
back in June that it was considering tightening policy settings.   This could be because financial markets think that economic
                                                                   activity will bounce back once lockdowns are lifted.
In addition, concerns about the spread of the Delta variant
have meant some countries are back in lockdown, including
                                                                   Figure 13: NZ dollar exchange rate vs major countries
those in the Asia-Pacific region. This development led the
Asian Dollar Index, a basket of Asian currencies measured                Index = 100 in Jan 2020                          Index = 100 in Jan 2020
                                                                   115                                                                              115
against the US dollar, down by about 1%. The AUD also
suffered, sliding 4.5% and dragging the NZD (down 2%)              110                                                                              110
with it.
                                                                   105                                                                              105

The New Zealand dollar’s fall came despite the economy             100                                                                              100
gathering steam over recent months. This strength and an            95                                                                              95
associated uplift in inflation has meant that the RBNZ has
                                                                                                     US dollar                UK pound
taken the first steps to tighten monetary policy. Commodity         90                                                                              90
prices have also been very strong, and we discuss these                                              Australian dollar        Japanese yen
                                                                    85                                                                              85
trends more in the Agricultural outlook section.                          Source: Bloomberg
                                                                                                     Chinese yuan
                                                                    80                                                                              80
                                                                    Jan 2020                  Jul 2020             Jan 2021              Jul 2021
However, we expect that eventually the NZD is likely to lift
on these fundamental factors. The New Zealand economy
is outperforming most of its peers. And, reflecting this
outperformance, the RBNZ is poised to lift the OCR in
advance of other key central banks. As a result, interest
rate differentials should provide a tailwind for the NZD, and
we have upgraded our NZD forecast over coming quarters             Exchange rate forecasts (end of quarter)
despite an initially lower starting point.
                                                                                  NZD/          NZD/       NZD/          NZD/      NZD/
                                                                                                                                               TWI
                                                                                  USD           AUD        EUR           GBP       JPY
We also expect that red hot commodity prices will continue
                                                                   Sep-21          0.71          0.95       0.59         0.50       78.8       74.4
to provide support to the New Zealand dollar. New Zealand’s
overall commodity prices hit record highs in June. And while       Dec-21          0.74          0.95       0.61          0.52      82.1       76.4
the price baton is now passing between dairy and meat export       Mar-22          0.76          0.95       0.62          0.53      85.1       77.5
prices, we expect commodity prices to remain very high over        Jun-22          0.77          0.94       0.63          0.53      86.2       77.9
the remainder of 2021 and into 2022.
                                                                   Sep-22          0.77          0.94       0.64          0.53      86.2       77.7

The stronger outlook for the New Zealand economy has led           Dec-22          0.77          0.94       0.64          0.53      87.0       77.6
us to upgrade our forecast for the NZD/AUD cross. Like the         Mar-23          0.76          0.94       0.63          0.53      85.9       76.8
USD story, New Zealand is facing greater capacity pressures        Jun-23          0.75          0.94       0.63          0.52      85.5       76.0
compared to Australia. Part of this has been our success in        Sep-23          0.74          0.94       0.62          0.52      84.4       75.1
containing Covid, which has supported a faster recovery in
activity. The RBNZ is currently more hawkish than the RBA as it    Dec-23          0.73          0.94       0.61          0.51      84.0       74.3

                                                                                                                         Economic Overview August 2021 | 09
Special topic.
       Getting to the pointy end: Life after vaccination.

       New Zealand’s plan for dealing with Covid-19 depends crucially on a high level of vaccination.
       But the more serious Delta variant means it’s likely that ongoing controls, as well as high vaccine
       coverage, will be needed as we reopen our border. We consider some of the ways that this might
       play out, based on what we’re seeing in other countries as they learn to manage Covid long-term.

       (Vac)cine but not herd.                                             vaccination this year, it’s unlikely that we’ll be able maintain
                                                                           this pace every year. The flu jab is likely to be the model here
       Widespread vaccination is central to the world’s fightback          on an ongoing basis, with a focus on high coverage for the
       against Covid-19. The ideal outcome would be to vaccinate           older cohorts who are by far the most vulnerable.
       enough of the population to reach ‘herd immunity’, the point
       at which the virus’ reproduction rate falls below 1. Beyond this    New Zealand will need to maintain its testing and contact
       threshold, any outbreaks will tend to burn out on their own,        tracing capabilities, and probably beef them up to handle the
       as the virus won’t be able to find enough new hosts to spread       return of overseas visitors. The ability to restrict movements
       itself to.                                                          and large gatherings will remain part of the toolkit, though
                                                                           they may only need to be used in a localised way.
       At the start of the year, that goal looked challenging but
       achievable. But it’s clear that the Delta variant is different      The use of masks, and stay-at-home orders for people who
       enough to change the game: it’s much more contagious,               test positive, have proven to be helpful in reducing the spread
       and vaccines are less effective at preventing infections            of Covid. The tricky part is to what extent they should be made
       (they are still highly effective, but not perfect, at avoiding      mandatory, and if so, who bears the cost of enforcing them.
       severe illnesses and deaths). Modelling shows that as Delta         Stay-at-home orders would mean more absenteeism than
       becomes the dominant variant, herd immunity would require           we’ve had before, which will have implications for workplaces.
       vaccinating over 90% of the population, which puts it out of
       reach in practical terms.
                                                                           Papers, please.
       That’s certainly not reason to despair about the prospects of
                                                                           The world is moving towards proof of vaccination as a
       reopening our borders. What it does mean is that vaccination
                                                                           requirement for international travel, and New Zealand
       alone won’t be sufficient – enough of the population would
                                                                           will inevitably need to align with this. This is actually quite
       still be susceptible to the spread of Delta that it could lead to
                                                                           complex, as it requires being able to verify documents that
       unacceptable health outcomes. To avoid that, it’s likely that
                                                                           have been issued by hundreds of national or state authorities.
       additional controls will be needed on an ongoing basis. Such
                                                                           The International Air Transport Association is working with
       controls need not be onerous, and the cost of enforcing them
                                                                           airlines to develop a global standard.
       would be well worth it if they obviate the need for lockdowns.
                                                                           More controversial is the idea of vaccine ‘passes’ for
       In a way, the rest of the world is moving towards the same
                                                                           internal movements, such as entering tourist attractions,
       conclusion. The difference is that for most countries, that
                                                                           large gatherings or indoor dining. Governments may be
       represents a move towards reopening their economies and
                                                                           understandably reluctant to impose this kind of segregation
       fewer (but still some) restrictions, whereas for us it would
                                                                           (though France is a notable early adopter). But it’s the
       mean more restrictions compared to what we currently
                                                                           private sector that is leading the way here, with the implicit
       enjoy. Hence, we can look overseas as a guide to some of the
                                                                           endorsement of their customers. In countries where the
       control measures that might emerge here. The Government
                                                                           majority of people have been vaccinated, surveys show that
       has recently set out its preferred path towards reopening the
                                                                           the idea of a Covid pass is fairly popular – once people have
       border, but that could evolve as conditions change – as the
                                                                           done what they can to protect themselves, they like the idea of
       saying goes, no plan survives its first contact with the enemy.
                                                                           not having to mingle with the unvaccinated. Increasingly, large
                                                                           firms are also introducing vaccination requirements for their
       There’s a growing view that Covid-19 will become endemic, and
                                                                           employees. In part this is about getting workers back into the
       like influenza, may require booster shots every year to deal
                                                                           office safely, as support for working remotely is waning.
       with new variants. And while we may be able to reach 80%+

10 | August 2021 Economic Overview
Economic and financial forecasts.

New Zealand forecasts

GDP components                                Quarterly % change                                      Annual average % change
                                     Jun-21   Sep-21         Dec-21          Mar-22           2020           2021           2022         2023
GDP (production)                      1.5      0.9            0.9             0.2             -2.9           6.4                 3.1      2.6
Private consumption                   0.3      1.7            1.3             0.0             -1.9           11.2            2.4          1.1
Government consumption                1.2       1.1            1.1            0.9             6.4            5.9                 3.7      2.5
Residential investment                2.0      1.8            1.5             1.2             -4.1           19.9            4.7          0.6
Business Investment                   1.7      0.6            -0.8            1.6             -9.0           12.1                4.1      5.1
Exports                               9.7      1.0            1.6             0.0             -11.8          -2.8                7.1      7.8
Imports                               4.8      2.0            1.5             1.2             -16.4          17.7            6.0          4.3
Economic indicators                           Quarterly % change                                             Annual % change
                                     Jun-21   Sep-21         Dec-21          Mar-22           2020           2021           2022         2023
Consumer price index                  1.3       1.1           0.1             0.6              1.4           3.4                 2.1      1.9
Employment change                      1.1     0.5            0.4             0.3             0.7            2.6                 1.5      1.7
Unemployment rate                     4.0      3.8            3.7             3.6             4.8            3.7             3.5          3.7
Labour cost index (all sectors)       0.7      0.7            0.7             0.5              1.6           2.6             2.4          2.5
Current account balance (% of GDP)    -3.3     -4.3           -4.6            -4.3            -0.8           -4.6            -4.4        -4.1
Terms of trade                        3.6      1.0            0.8             -0.4            -1.6           5.6             -1.0         0.4
House price index                     6.0      4.0            1.0             0.6             17.0           20.0            0.0         -3.6
Financial forecasts                              End of quarter                                                    End of year
                                     Jun-21   Sep-21         Dec-21          Mar-22           2020           2021           2022         2023
90 day bank bill                      0.27    0.90            1.10            1.20            0.27           1.10            1.60        2.10
5 year swap                           1.19     1.60           1.75            1.90            0.31           1.75            2.20        2.55
TWI                                   74.7     74.4           76.4            77.5            72.9           76.4            77.6        74.3
NZD/USD                               0.72     0.71           0.74            0.76            0.69           0.74            0.77        0.73
NZD/AUD                               0.93     0.95           0.95            0.95            0.94           0.95            0.94        0.94
NZD/EUR                               0.59     0.59           0.61            0.62            0.58           0.61            0.64        0.61
NZD/GBP                               0.51     0.50           0.52            0.53            0.52           0.52            0.53        0.51
Net core Crown debt (% of GDP)        31.0     33.1           34.8            36.7            32.5           34.8            41.0        43.6

International economic forecasts

Real GDP (calendar years)                                                            Annual average % change
                                                      2017            2018             2019           2020                2021f         2022f
Australia                                              2.4            2.8               1.9           -2.4                 4.2           4.5
China                                                  6.9            6.7               5.8           2.3                  9.3           5.8
United States                                          2.3            3.0               2.2           -3.5                 6.1           4.3
Japan                                                  1.7            0.6               0.3           -4.8                 2.5           2.7
East Asia ex China                                     4.7            4.4               3.7           -2.4                 4.6           5.0
India                                                  6.8            6.5               4.0           -8.0                 9.2           8.3
Euro Zone                                              2.6            1.9               1.3           -6.6                 4.5           4.4
United Kingdom                                         1.7            1.3               1.4           -9.9                 6.5           5.0
NZ trading partners                                    4.1            4.0               3.4           -1.8                 6.2           4.9
World                                                  3.8            3.6               2.8           -3.3                 5.7           4.7

                                                                                                                        Economic Overview August 2021 | 11
The economy in six charts.

       New Zealand GDP growth                                                                                   New Zealand employment and unemployment
                %                                                                                %                     Annual % change                                                            %
        15                                                                           Westpac
                                                                                                       15       8                                                                                          8
                                                                                                                             Employment growth (left axis)                              Westpac
                                            Quarterly % change                       forecasts                                                                                          forecasts
        10                                                                                             10       6            Unemployment rate (right axis)                                                7
                                            Annual average % change

            5                                                                                          5        4                                                                                          6

            0                                                                                          0        2                                                                                          5

         -5                                                                                            -5       0                                                                                          4

        -10                                                                                            -10      -2                                                                                         3
                    Source: Stats NZ, Westpac                                                                          Source: Stats NZ, Westpac
        -15                                                                                            -15      -4                                                                                         2
           2004                 2008            2012        2016            2020              2024                2004              2008              2012        2016         2020           2024

       90 day bank bills, 2 year swap and 5 year swap rates                                                     Exchange rates
                %                                                                                  %                     NZD exchange rate                                                  Index
        10                                                                                             10       1.00                                                                                  85
                                                                                       Westpac
         9                                          90 day bank bill rate                              9
                                                                                       forecasts
                                                                                                                0.90                                                                                  80
         8                                          2 year swap rate                                   8
                                                                                                                                                                                                      75
         7                                                                                             7        0.80
                                                    5 year swap rate
         6                                                                                             6                                                                                              70
                                                                                                                0.70
         5                                                                                             5                                                                                              65
         4                                                                                             4        0.60                                                                   Westpac
                                                                                                                                                         NZD/USD (left axis)           forecasts
                                                                                                                                                                                                      60
         3                                                                                             3        0.50
                                                                                                                                                         NZD/AUD (left axis)                          55
         2                                                                                             2
                                                                                                                0.40                                     TWI (right axis)
         1                                                                                             1                                                                                              50
                Source: RBNZ, Bloomberg, Westpac                                                                           Source: RBNZ, Westpac
         0                                                                                             0        0.30                                                                                  45
          2004                 2008             2012        2016            2020              2024                  2004              2008            2012        2016         2020         2024

       Official Cash Rate                                                                                       New Zealand house prices
                %                                                                                  %                   %                                                                          %
        4                                                                                                   4   35                                                                                    35
                                                                                   Westpac                                                                                            Westpac
                                                                                                                         Source: CoreLogic, Westpac
                                                                                   forecast                                                                                           forecasts
                                                                                                                30                                                                                    30
                                                                                                                25                           Quarterly % change                                       25
        3                                                                                                   3
                                                                                                                20                           Annual % change                                          20
                                                                                                                15                                                                                    15
        2                                                                                                   2
                                                                                                                10                                                                                    10
                                                                                                                  5                                                                                   5
        1                                                                                                   1
                                                                                                                  0                                                                                   0
                                                                                                                 -5                                                                                   -5
                Source: RBNZ, Westpac
        0                                                                                                   0   -10                                                                                   -10
         2010           2012          2014      2016      2018      2020       2022           2024                 2004              2008             2012        2016         2020         2024

12 | August 2021 Economic Overview
Contact the Westpac economics team.

    Michael Gordon, Acting Chief Economist                                                                       Paul Clark, Industry Economist
       +64 9 336 5670                                                                                               +64 9 336 5656
    Satish Ranchhod, Senior Economist                                                                            Gregorius Steven, Economist
       +64 9 336 5668                                                                                               +64 9 367 3978
    Nathan Penny, Senior Agri Economist                                                                          Any questions email:
       +64 9 348 9114                                                                                              economics@westpac.co.nz

Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the
forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

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