INDEPENDENT NEWS

Recovery on track despite headwinds

Published: Wed 30 Apr 2014 09:27 AM
Recovery on track despite headwinds
• The NZ economy continues to strengthen, with growth on course to hit 3.5% over the next year.
• Recent falls in dairy prices and the strong NZD are small flies in the ointment.
• The RBNZ will continue raising rates, but the cycle will not be overly aggressive.
New Zealand’s economy continues to strengthen, according to the latest ASB Quarterly Economic Forecasts, with lifting construction activity and dairy incomes from an exceptional season providing a further boost.
ASB Chief Economist Nick Tuffley says, “The economy remains comfortably on course for 3.5% growth over the next year. Construction and dairy remain key drivers, but the recovery is broadening beyond just those areas.”
The housing market has started to cool, but there are structural factors that will partially offset tighter monetary policy. “Net migration flows are boosting population growth and increasing demand for housing,” says Mr Tuffley. “That means house price inflation will slow gradually rather than abruptly in the centres that have been running hot.”
But there are two notes of caution to New Zealand’s economic performance. First, dairy prices have fallen quite rapidly in recent months, down 20% in the Global Dairy Trade auctions.
“Some softening was to be expected from 2013’s lofty levels, but the pressure has been greater and sooner than anticipated,” says Mr Tuffley. “It is important to remember though that the commodity story is not solely defined by dairy. Meat and forestry exports are also benefitting from improved demand.”
The second fly in the ointment is the NZ dollar, which remains stubbornly high and is maintaining pressure on exporters.
“Even as dairy prices were already falling, the NZ dollar Trade Weighted Index hit a post-float high at the start of April,” says Mr Tuffley. “The flipside is that a sustained higher currency would make the RBNZ more cautious about lifting the OCR.”
And with the RBNZ having now kicked off its hiking cycle, the question of how many hikes will be necessary is of paramount importance.
“We revised up our OCR forecast to a peak of 4.5% from our long-held view of 4% after the March Monetary Policy Statement. In a recent paper we looked very closely at a number of key influences on how far the OCR is likely to rise during the tightening cycle and remain comfortable with our 4.5% view.”
That is lower than what the RBNZ’s most recent interest rate forecasts imply. “But in our judgement, higher interest rates will be very potent in restraining borrowing growth and containing rising house prices. This will in turn keep inflation sufficiently in check,” Mr Tuffley concludes.
ENDS
ASB Bank
Helping you get one step ahead.
In 1847, ASB opened as the Auckland Savings Bank with the pledge: 'to serve the community; to grow and to help Kiwis grow'. And that is very much what ASB is about today.
ASB is a leading provider of integrated financial services in New Zealand including retail, business and rural banking, funds management and insurance.
ASB strives to consistently provide its customers with outstanding service and innovative financial solutions. They're dedicated to providing simple financial products that allow their customers to bank with them how and when they want.
We all have our own ways to measure progress, and our own stories about the things that matter to us. Whatever way you choose to measure progress, and whatever your goals, ASB is there to help you get one step ahead.
Contact ASB Bank
Website:

Next in Business, Science, and Tech

Global Screen Industry Unites For Streaming Platform Regulation And Intellectual Property Protections
By: SPADA
General Practices Begin Issuing Clause 14 Notices In Relation To The NZNO Primary Practice Pay Equity Claim
By: Genpro
View as: DESKTOP | MOBILE © Scoop Media