Employment is at or slightly above its maximum sustainable level while consumer price inflation is close to the 2 percent mid-point of our target range. Low interest rates remain necessary to keep employment and inflation around target.
Economic growth is expected to accelerate over the second half of 2020 driven by monetary and fiscal stimulus, and the high terms of trade. The outlook for government investment is stronger following the Government’s announcements in December. There are also indications household spending growth will increase.
However, soft momentum in economic growth has continued into early 2020. Slower global growth over 2019 acted as a headwind to domestic growth. In addition, competitive pressures and recent subdued business confidence have suppressed business investment.
The global economic environment has shown signs of stabilising and trade tensions have receded somewhat. However, the COVID-19 (coronavirus) outbreak is an emerging downside risk.
We assume the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration, with most of the impacts in the first half of 2020. Nevertheless, some sectors are being significantly affected. There is a risk that the impact will be larger and more persistent. Monetary policy has time to adjust if needed as more information becomes available.
By Chas Gunarathne