ASB Bank is the latest to provide a glowing set of forecasts
for the domestic economy in its Quarterly Economic Forecasts,
released this morning.
In the forecasts, ASB chief economist Nick Tuffley said
domestic developments had remained positive in recent months
and pointed to economic growth increasing during the coming
''We continue to expect construction growth and stronger
household spending to be the key drivers of the New Zealand
economy. Added to that is the continued recovery in the
agriculture sector from the drought over early 2013.''
In particular, milk production had recovered to high levels
and, with global dairy prices remaining high, would boost
on-farm revenue by more than $4.5 billion, he said.
Meat prices had also recovered from the impact of drought and
exports to China had increased in recent years.
Related to New Zealand's strong commodity export performance
was China's importance to New Zealand's economic performance.
Last year, New Zealand's annual merchandise exports to China
exceeded those of Australia for the first time.
''China is becoming increasingly important for tourism,
though, in this case, has a long way [to go] to knock
Australia off its number one position.''
Businesses were also feeling increasingly optimistic about
their trading conditions and the New Zealand economy, Mr
The improvement in profitability expectations was
encouraging, with recent surveys pointing to a broadening in
the recovery beyond Canterbury.
''Given the extent of work still required, we expect the
earthquake rebuild in Canterbury will remain a key driver of
growth in the New Zealand economy in coming years.''
The activity of architects in the latest NZIER Quarterly
Survey of Business Opinion provided a good indication of the
building industry outlook over coming years, Mr Tuffley said.
While there had been an easing in architects' activity more
recently, the measures remained at historically high levels,
and suggested further growth in residential investment in
The Canterbury rebuild and stronger house-building demand in
Auckland would be the key drivers of construction growth.
The Reserve Bank's announcement it would exempt new
residential construction loans from the restrictions on
high-loan-to-value lending was likely to support a continued
improvement in house-building demand and remove one potential
road block to addressing Auckland's housing supply shortage.
The economic recovery was starting to show in early signs of
rising inflation in the next couple of years, from very
benign levels to a pace where the low interest rates of the
past five years were no longer sustainable, Mr Tuffley said.
Interest rates were on the way up and ASB expected the
official cash rate to reach 4%, from the current 2.5%, by the
end of 2015 through a gradual series of lifts.
''Our interest rate outlook is on the low side of the
consensus and we acknowledge the risks are skewed to a faster
and greater tightening cycle.
''But we are mindful of the sensitivities household and
business borrowing decisions are likely to have to higher
interest rates in the wake of the global financial crisis.
''The dampening impact of a persistently-high New Zealand
dollar on non-commodity exporters, and the high proportion of
floating and very short-term fixed mortgage rates, mean
households will be affected quickly by a rising OCR.''
The cliche of the central banker was ''to take away the punch
bowl just when the party is getting good'', Mr Tuffley said.
The gradual nature to date of the economic recovery meant
some people might still feel they missed out on their party
Central banks learnt from the 2000s that letting exuberance
get out of hand could have devastating consequences, he said.
''The risk at the other extreme is causing the party to fizz
out before it gets interesting.
"For the moment, a measured approach to higher interest rates
seems the soundest path. Borrowers need to be prepared for
higher interest rates,'' he said.
At a glance
• The outlook for New Zealand's economy is increasingly
• Economic growth likely to hit 3.5% this year
• Rising construction activity and strong dairy incomes will
boost the economy this year
• Reserve Bank likely to raise official cash rate in March