Quarterly Economic Forecast: A firm grip on the punchbowl

Tuesday, 4 February 2014, 3:33 pm
Press Release: ASB Bank

Media release
ASB Quarterly Economic Forecasts February 2014

EMBARGOED UNTIL 5am Tuesday 4 February 2014

A firm grip on the punchbowl

• The outlook for New Zealand’s economy is increasingly bright, with growth likely to peak at around 3.5% this year.
• Rising construction activity and strong dairy incomes will boost the economy over 2014.
• The RBNZ is likely to raise the OCR in March, “taking away the punchbowl just when the party is getting good.”

The outlook for New Zealand’s economy looks increasingly bright, according to the latest ASB Quarterly Economic Forecasts. 2014 has got off to a positive start, with New Zealand’s labelled as a ‘rock star’ economy. ASB Chief Economist Nick Tuffley says, “The early signs are encouraging. We expect growth to hit around 3.5% this year, with two key drivers being construction and agriculture.”

Construction will lift as the Canterbury rebuild ramps up further, and as homebuilding demand in Auckland boosts construction there. “But the benefits of that growth will spread further afield as the manufacturing sector lifts in response and as other services get called on,” explains Mr Tuffley.

Dairy income is expected to lift by over $4.5bn from last season, thanks to a combination of higher production and strong prices. Mr Tuffley says, “Continued growth in demand from China points to a very promising outlook for both dairy and meat exports this year.”

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Over 2013, New Zealand’s annual merchandise exports to China exceeded those to Australia for the first time. Because of China’s growing importance as an export destination, New Zealand’s prospects are increasingly tied to those of China.
“China’s GDP grew by 7.7% in 2013, which was the slowest rate of growth in 14 years,” says Mr Tuffley. “Over coming years, slower Chinese growth is a mathematical certainty. But we should welcome China’s growth easing to a sustainable rate as that reduces the risk of boom/bust cycles. And even GDP growth of around 7% in 2014 would generate a similar addition to global growth as the earlier 10%-plus growth rates, when the Chinese economy was smaller.”

With New Zealand’s economic outlook brightening, interest rate increases are a virtual certainty over 2014 and 2015. The key question is how quickly rates will rise. “Interest rates are on the way up. We expect the Official Cash Rate (OCR) to reach 4% by the end of 2015 through a gradual series of lifts starting in March.
“It brings to mind the cliché of the central banker ‘taking away the punchbowl just when the party is getting good’,” says Mr Tuffley.

“Our interest rate outlook is on the low side of the consensus and we acknowledge that the risks are skewed to a faster and greater tightening cycle. But rate hikes are likely to have a fair amount of bite, given that borrowers have become used to low interest rates and a large proportion of mortgages are on floating interest rates,” concludes Mr Tuffley.

ENDS

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