Onwards and upwards

New Zealand’s economic growth is set to head upwards over the next couple of years, while interest rates dip further, a new report says.

Tuesday, May 3rd 2016, 5:00AM

ASB has released its latest Quarterly Economic Forecasts and they suggest the 2.4% growth estimated for early 2016 is at the bottom of the range.

The bank’s chief economist Nick Tuffley said the dairy sector continues to drag on the economy and that, teamed with weak dairy production in the first half of 2016, will restrain overall growth into 2017.

But from here on in the only way is up, with growth likely to get tantalisingly close to 4%, he said.

“The key influences outlined in our February report remain key drivers in propelling the country’s overall growth.

“Strong population growth, lower interest rates and, since its highs of 2014, the weakened NZD continue to work to drive growth.”

Further, short-term interest rates, which are already sitting at historical lows, are likely to dip further, Tuffley said.

“Developments since the Reserve Bank’s OCR cut in March have tipped the odds towards further OCR cuts and we think the Reserve Bank is likely to cut the OCR by 50 basis points by August 2016.”

Consumer spending growth and investment spending will benefit from all of these drivers, while tourism and, notably, construction will be strong economic players.

Tuffley said they expect the combination of these drivers to push per-capita growth back up to 2%.

“That’s a level not seen since the high of 2014… 2% might not sound like a flashy figure. But, to give a dose of perspective, per-capita growth has only averaged 1.3% since 1988.”

However, while global financial markets have calmed since the beginning of the year, they remain a concern.

Tuffley said there are still a few potential speed bumps for the global economy – including concerns over the stability of European banks which has led to a spike in banks’ risk premia.

“While China remains a key source of concern in the global economy, there are tentative signs of stabilising, and less instability in emerging markets have recently helped calm financial markets and firm up commodity prices.”

ASB expects below-average global growth over 2016 followed by modest improvement in 2017.

Alongside the forecast, Tuffley also issued a housing market warning.

“With the inflation outlook arguing for lower interest rates, but the housing market heating up, there is a growing risk the Reserve Bank will widen its investor lending restrictions to the rest of the country and come down even harder on Auckland.”

Tags: ASB banks interest rates OCR forecasts