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ASB Quarterly Economic Forecasts August 2016

Media release

ASB Quarterly Economic Forecasts August 2016

Respectable growth outlook despite global surprises

• NZ growth outlook remains respectable, boosted by migration, construction and kiwifruit

• Inflation remains weak, with inflation projected to remain below 1% for a 3rd year

• Rampant housing market may come off the boil in 2017, but keep simmering

Despite a dramatic global economic backdrop, the growth outlook for the New Zealand economy remains very respectable, according to the latest ASB Quarterly Economic Forecasts.

ASB Chief Economist Nick Tuffley says the global economy have been volatile and full of diverse surprises over 2016.

“New Zealand and the global economy has weathered China’s New Year equity meltdown, blowtorches applied to European banks and the surprise Brexit vote,” Mr Tuffley says.

New Zealand economic growth is forecast to improve, boosted by migration, construction and non-dairy exports.

“Interest rates are extremely low and set to stay that way into 2018,” Mr Tuffley says

“Migration inflows remain strong and will support growth, while the strength of the housing market and construction is rippling out to many regions. At the same time, exports are faring well generally, with one recent standout being the kiwifruit sector’s record exports.”

Inflation to remain below target for a 3rd year

Despite solid growth, New Zealand’s inflation outlook remains weak.

“We don’t see inflation exceeding 1% until the second half of 2017, at which point inflation will have been below 1% for nearly three years,” Mr Tuffley says.

To a large extent, 2016 has been shaped by the Reserve Bank’s ongoing struggle to manage the conflicting risks from a rampant housing market and the impact of a higher exchange rate on the inflation outlook.

“The additional investor lending restrictions the RBNZ is introducing give the Reserve Bank a little more room to address low inflation with a reduced risk of inflaming the housing market further,” Mr Tuffley says.

“We expect the RBNZ to drop the OCR to 1.75% by November and, if the NZD continues to hold up, an even lower OCR is possible.”

Housing market to cool to a simmer

The Reserve Bank’s new lending restrictions are expected to slow the housing market up and down the country over the rest of this year.

“The sort of price growth a number of regions have experienced over the last couple of years will not be sustained. Expect 2017 to be much quieter on the housing front,” Mr Tuffley says.

Auckland supply is still trying to catch up with demand and the city is unlikely to see building consent issuance match population growth requirements for a couple of years. “House prices in Auckland may bounce slightly in the first half of 2017 after a likely soft end to 2016,” Mr Tuffley says.


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