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ASB Quarterly Economic Forecasts May 2017

Media release

ASB Quarterly Economic Forecasts May 2017

EMBARGOED UNTIL 5AM MONDAY, MAY 8, 2017

Tempest in a teacup

• NZ economic growth forecast to hit 3.5% next year, but tourism and construction won’t sustain their recent growth pace

• Global outlook is in reasonable shape despite geopolitical storm clouds

• RBNZ still expected to hold OCR until late 2018, despite headline inflation hitting 2%

New Zealand’s economic growth is expected to step up to 3.5% next year, but growing pains are expected to slow growth in the tourism and construction sectors, according to the latest ASB Quarterly Economic Forecasts.

ASB Chief Economist Nick Tuffley says low interest rates, strong population growth and solid demand for New Zealand exports will remain key factors supporting the economy’s strong performance.

Barring any major storms offshore, New Zealand growth is expected to be fairly steady at around 3% this year, stepping up to 3.5% next year.

But constraints on tourism and construction mean they won’t sustain their recent growth pace, Mr Tuffley says.

“The surge in visitors to New Zealand over the past few years is increasingly stretching accommodation capacity and, while that’s spurring more hotel investment, it will take some time to catch up.

“Overall construction growth will also slow, and mainly be reduced to areas such as Auckland and Wellington, which will continue to struggle to build fast enough to meet population growth demands.”

International outlook

With a robust domestic demand outlook largely ‘locked in’, the key risks to New Zealand’s prosperity are largely those stemming from global economic and political uncertainty, Mr Tuffley says.

There have been no big bangs yet on the US policy front, and importantly for New Zealand, the Trump-led swing to trade protectionism has not been as bad as feared.

However, North Korea and Syria remain diplomatic powder kegs. And without resolutions to these conflicts in the short term we are likely to see sporadic military and political flare-ups that add to financial market volatility from time-to-time, Mr Tuffley says.

“The main tempests are on the geo-political front, but when stepped back from the noise, global growth is in reasonable shape and providing a good foundation for NZ.”

OCR a sea of tranquillity

“An area that we do expect to be a sea of tranquillity is New Zealand’s Official Cash Rate, unless of course, there is a major Trump Tempest,” Mr Tuffley says.

Having surged over the last six months, CPI inflation is back to a normal level, but mainly through jumps in fuel and food prices.

“Low interest rates will still be needed to keep pushing the economy along and generate a greater degree of inflation pressure.

“With capacity pressures beginning to translate into stronger domestic inflation, we expect CPI inflation will now remain comfortably within the RBNZ’s target band of 1-3%.”

ENDS


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