NZ economy set to grow

New Zealand is set for a year of overall economic growth but the latest ASB quarterly economic forecasts show global growth forecasts have been downgraded.

ASB chief economist Nick Tuffley said New Zealand's economic growth would be about 3% for the calendar year and consumer spending would be an important driver of growth.

Strong population growth meant more people being fed and clothed.

Employment growth was solid and interest rates were likely to remain low.

As a net energy importer, New Zealand was ''very much a winner'' from the recent plunge in oil price, he said.

Households would benefit from added purchasing power, although negatives for New Zealand were the impacts on its oil extraction and exploration industries as well as weaker dairy and meat demand from oil-exporting nations.

''The main challenges for New Zealand lie on the export front. Dry conditions are starting to bite in several regions around the country which will crimp dairy production and soften meat prices through added livestock slaughter.''

Dairy prices, while still low, were showing early signs of gradual recovery.

Growth in China and Australia - New Zealand's two largest trading partners - was modest by their respective standards, and there were no signs yet of an improvement, Mr Tuffley said.

ASB economists were mindful of global risks.

The European Central Bank was implementing a large quantitative easing programme to boost growth and help ward off the threat of deflation.

Greece had elected an anti-austerity government wanting to renegotiate the conditions of its past bail-outs, while also needing to agree on some future support.

Global risks, combined with the plunge in oil prices, had pushed down interest rates around the world.

And some central banks had explicitly cut their benchmark interest rates: Denmark because of the added challenge of maintaining a currency peg with the weakening euro; Canada because of heavy economic dependence on oil exploration and extraction activity; Australia on weak domestic demand as it struggled to rebalance after the end of its commodity investment boom, he said.

New Zealand's inflation outlook had change dramatically in a relatively short space of time.

New Zealand had started to appear as if it could grow at a fast pace without generating much inflation.

But the high-growth/low-inflation ''new paradigm'' got tempered after extensive data revisions showed growth for the past few years was not as strong as previously reported.

Falling oil prices meant the annual inflation rate would fall close to zero early this year, Mr Tuffley said.

Normally, changing oil prices would not influence the Reserve Bank's actions but in this case, inflation had already been very subdued for a long period.

''All up, we think the Reserve Bank will be reluctant to lift interest rates until inflation is clearly moving above the 1% floor of the inflation target. This won't happen until 2016.

"By then, we expect the Reserve Bank will be comfortable future inflation pressures will be sufficiently contained without further action,'' he said.

dene.mackenzie@odt.co.nz

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