ASB Quarterly Economic Forecasts

ASB Quarterly Economic Forecasts July 2013

EMBARGOED UNTIL 5am Wednesday 24 July 2013

Economy making gains, but with house price pains

• New Zealand’s economic recovery appears to be broadening, though drought is still causing hurt this year.

• Domestic developments have the RBNZ in a bind.

Some events seem to be going New Zealand’s way with the economy making steady progress as it recovers from the deep recession during 2008 and 2009, according to ASB’s latest Quarterly Economic Forecasts.

ASB Chief Economist Nick Tuffley says, “Momentum is becoming more evident across a broader range of economic activity, which is a pleasing development. The lower NZ dollar across several currencies will be providing some relief for a number of exporters, and strong dairy prices have enabled Fonterra to forecast a robust milk payout for the new season in the wake of the drought.”

Mr Tuffley is particularly encouraged by the domestic outlook, “The rebuild of Canterbury continues to gather momentum. Recovery in the region is spreading beyond construction to other activity, such as employment and retail spending.”

Nevertheless, Mr Tuffley warns New Zealand still faces some challenges. “That’s because the global environment still has potholes.” Mr Tuffley points to the increase in political instability in Europe, and the increased uncertainty around Australia’s and China’s outlooks. These developments have been broadly offset by encouraging economic signs in the US and Japan.

In addition, strong house price growth in Auckland and Canterbury is causing the RBNZ concerns that any future pullback in prices could impact the financial system and broader economy.

Mr Tuffley says, “Domestic developments have the RBNZ in a bind: higher interest rates are the most effective way to curb rising house prices, but the inflation outlook doesn’t warrant higher interest rates just yet.” Mr Tuffley sees a strong possibility the RBNZ will impose restrictions on new mortgage lending with high loan-to-value ratios. However, Mr Tuffley points out, “Such limits risk placing the burden of dealing with overheating house prices on first-home buyers, arguably the most deserving of prospective home buyers.”

ENDS

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