Media release

ASB Quarterly Economic Forecasts February 2017

EMBARGOED UNTIL 5AM FRIDAY, FEBRUARY 3, 2017

Making hay while the sun shines

• ASB economists remain optimistic about NZ’s economic growth prospects.

• But there are a few clouds hanging offshore, and they appear to be the main threats to a strong NZ performance.

• We expect the RBNZ to keep the Official Cash Rate on hold for a considerable period.

ASB economists remain optimistic about growth prospects for New Zealand this year, predicting calendar year growth of 3.5% in the latest ASB Quarterly Economic Forecasts.

ASB chief economist Nick Tuffley says that growth pace is not just about the still-strong flow of people wanting to live in New Zealand. Rather, per-capita growth is heading back to its long-run average.

“Construction continues to lift to meet the needs of a growing population and a number of export sectors are performing well, including tourism and fruit,” Mr Tuffley says. “Dairy prices have now recovered to a level that will return most dairy farmers to profitability.”

The housing market is, however, on track for a soft landing this year.

“The Auckland market was losing momentum even ahead of the most recent investor loan restrictions, but will remain well supported by continued undersupply.”

Global threats

While domestic conditions appear sunny, there a few clouds hanging offshore and they appear to be the main threats to a strong New Zealand performance, Mr Tuffley says.

“There is still a lot of uncertainty over what impact Donald Trump’s presidency will have, and the pace of rate hikes from the US Federal Reserve. Threats to crack down on Chinese imports would be a risk to New Zealand’s export outlook.”

At this point, however, New Zealand is still “sitting pretty” with plenty of monetary and fiscal ammunition to deal with any unexpected slowdown.

Interest rates to remain low

ASB economists expect the RBNZ to keep the Official Cash Rate (OCR) on hold for a considerable period (to the end of 2018), continuing to underpin the domestic economic growth story.

“With inflation now back into the 1-3% target band and dairy prices now substantially higher, the RBNZ will be less concerned about the risks of inflation remaining unexpectedly low,” Mr Tuffley says.

“However, there are still plenty of risks that inflation does struggle to sustain around the 2% level over the next few years.”

The NZ dollar is set to remain high, term interest rates are also delivering a little restraint of their own, and banks face added challenges in obtaining sufficient funding to cover strong loan demand, Mr Tuffley says.

ENDS