ASB joins chorus of optimism

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 year.

''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 Tuffley said.

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 coming years.

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 invitation.

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 bright

• 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


 

 

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