ASB November Economic Forecasts: Shifting sands in economies

Monday, 3 November 2014, 10:15 am
Press Release: ASB Bank

ASB Quarterly Economic Forecasts November 2014: Shifting sands in the domestic and global economies

November 3, 2014

• Weaker dairy incomes and an earlier depreciation in the NZ dollar drive a shift in domestic growth composition
• Global economies also face many opposing forces and risks
• Little urgency for the Reserve Bank to tighten monetary policy further

Lower dairy farm income and an earlier-than-expected fall in the NZ dollar are the key influences on the New Zealand growth outlook, according to the latest ASB Quarterly Economic Forecasts.

Combined, these developments point to a slightly softer growth outlook relative to the previous Quarterly Forecasts.

ASB Chief Economist Nick Tuffley says the key change this quarter is in the composition of where this growth will come from.

“We expect softer domestic demand will be largely offset by the boost to the broader export sector and import-competing industries from an earlier decline of the NZ dollar,” Mr Tuffley says.

The global economic outlook is clouded by risks from weak activity in the Eurozone, ongoing geopolitical risks and fears about the spread of Ebola. “As ever, uncertainty looms on the horizon. There are question marks over the Eurozone recovery and when the Federal Reserve will tighten monetary policy now that it has wrapped up its asset purchase programme,” Mr Tuffley says.

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The Chinese economy is also showing signs of slowing, driven by housing market weakness.

“However, the continued shift in the Chinese economy from investment-led to consumption-led growth is positive for New Zealand’s long-term export outlook” Mr Tuffley says.

Despite strong activity over the past year, the New Zealand inflation environment remains subdued. “We expect annual inflation will remain close to the bottom of the Reserve Bank’s inflation target of 1% over the next six months.”

ASB economists now expect a lower OCR peak of 4% being reached in March 2016. “With the flow-through effect of improving economic activity to inflation pressures muted, we expect the Reserve Bank will not have to lift interest rates as soon or as high as we expected three months ago.” Mr Tuffley says. “We expect the Reserve Bank will resume its tightening cycle in September 2015, followed by a final OCR increase in March 2016.”

ENDS

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