Economy status still 'rock star'

The New Zealand economy is still a rock star, according to Paul Bloxham, the man who originally coined the phrase.

In a New Zealand economics comment, Mr Bloxham, the chief economist for HSBC Bank Australia, said despite lower dairy prices and lower growth in its major trading partners, New Zealand's economy continued to be supported by a construction boom and the story had further to run.

As a result, interest rates were at high levels when compared with the rest of the developed world and the currency was high.

The New Zealand dollar was nearing parity against the Australian dollar for the first time in 42 years. Some early signs of domestic price pressures picking up suggested the New Zealand Reserve Bank was unlikely to cut rates this year, in contrast to current market pricing, he said.

Mr Bloxham said there were a range of indicators showing the New Zealand economy was still booming.

The broadest economic indicator of gross domestic product, or GDP, showed growth was broad based across industries with 15 of 16 sectors showing expansion over 2014. Overall GDP was running at a well above annual trend of 3.5%. The more timely indicators confirmed the strength had continued into 2015.

After moderating in the middle of last year, in response to last year's 1% increase in the official cash rate, business and consumer sentiment had bounced back in recent months and were at levels implying continued above trend growth, he said.

Housing price growth had also picked up pace in the past six months, after easing back in response to the Reserve Bank's actions.

''Given the ramp up in Auckland housing prices, the Reserve Bank looks set to expand its macroprudential tightening measures in June.''

The economy was largely being driven by domestic factors, Mr Bloxham said.

The post earthquake rebuild of the Canterbury region was increasing and strong population growth was supporting an upswing in residential construction in Auckland. The building boom was creating jobs, boosting incomes and confidence, supporting increased spending.

The external environment had been less favourable, he said.

Slower growth in China and very strong supplies of dairy products, due to a good growing season, meant a sharp fall in dairy prices last year _ weighing on this year's farmers' payout.

Australia and Japan were major trading partners and their economies had been weakening recently.

''But when you add up the weaker external and the strong domestic story, you still end up with an economy that is now growing at an above trend pace. We expect this to continue through 2015.''

It should be no surprise the Reserve Bank had much higher interest rates than elsewhere. The cash rate was 3.5% in a world where the major central banks had zero or negative policy rates. Australia had a cash rate of 2.25% and markets expected it to be cut further, Mr Bloxham said.

In the current environment, it also made sense the local currency was strong. The New Zealand dollar had been strong against a range of currencies, leaving its trade weighted index (TWI) _ the basket of currencies of New Zealand's major trading partners _ near record highs.

If the dollar reached parity with the Australian currency, it would be the first time since October 18, 1973. Back then, it only stayed above parity for a few hours.

''Given the strength of the economy, it would be more surprising if the currency was weak.''

What was surprising was how much concern there had been from New Zealand policymakers about the high level of the dollar.

The Reserve Bank had noted the currency was unsustainably and unjustifiably high. Prime Minister John Key had reiterated concerns about the high dollar and its impact on exporters.

But at this stage, much of the data did not support those concerns, Mr Bloxham said.

Exchange rate sensitive exports such as manufactured goods and tourism services were performing well despite the high currency. Inbound tourism numbers recently reached a record high.

At a glance

• Economy running at above trend pace.
• Reserve Bank unlikely to cut rates this year.
• If dollar parity achieved with Australia, first time in 42 years.
• No surprise New Zealand has high interest rates compared with rest of world.

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