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Quarterly Forecast: The maturing of a “rock star” economy

Media release

ASB Quarterly Economic Forecasts July 2014

EMBARGOED UNTIL 5am Tuesday July 29 2014

The maturing of a “rock star” economy

NZ economy maintains good momentum in 2014.

But signs emerge that growth will moderate to a more sustainable pace next year.

High NZD remains a dilemma for the RBNZ as it continues on its tightening path.

Growing divergence between global commodity export prices and the NZD poses on-going dilemma for the Reserve Bank.

Momentum continues in the New Zealand economy in 2014, according to the latest ASB Quarterly Economic Forecasts. But signs have emerged that growth will moderate to a more sustainable pace over 2015.

ASB Chief Economist Nick Tuffley says New Zealand’s economic growth is running above trend, led by a surge in construction activity.

“We are seeing this construction growth flow through to stronger demand across a broad range of sectors,” Mr Tuffley says.

However, there are signs the New Zealand economy is beginning to respond to higher interest rates.

“The easing in business and consumer confidence more recently point to a moderation in growth next year.” Mr Tuffley says. “This will see New Zealand economic growth moderate to a more sustainable pace.”

The ongoing decline in global commodity export prices, particularly for dairy, has softened the tone of recent developments. But despite these commodity price declines, the NZ dollar remains high.

“The growing divergence between global commodity export prices and the NZD poses a continued dilemma for the RBNZ,” Mr Tuffley says.

Yield demand for the NZD remains strong in the low foreign exchange volatility environment.

“The NZD strength is exacerbated by the RBNZ’s continued path to raising interest rates. This is in stark contrast to the loose monetary policy still undertaken by many central banks,” Mr Tuffley says.

“We expect the NZD will soften, but not materially until next year when other major central banks look to return monetary policy to more normal settings. For now, continued NZD strength is one factor likely to keep the RBNZ on hold until late in the year.”

ASB economists expect the OCR will peak at 4.5% in the second half of next year.

“Housing market activity has already started to moderate, and we expect further moderation over the next couple of years as the higher interest rates and new housing supply restrain housing demand,” Mr Tuffley says.


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