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ECONOMIC OUTLOOK – GROWTH WITH CHALLENGES

by Simon Lord,
last updated 15/05/2015

in this article:

May 2015 - Solid growth to continue for now, but two-speed economy presents challenges says Westpac

Westpac Chief Economist Dominick Stephens is forecasting that at least another year of full-bodied economic growth lies ahead for New Zealand, as surging domestic demand outweighs the pain in parts of the agricultural sector. The outlook for domestic demand has continued to strengthen, with booming housing and construction, surging population growth, and increasingly strong household spending.

Writing in the latest issue of the Westpac Quarterly Economic Review, he says, ‘We’re expecting that the economy will remain solid over the next couple of years, and are forecasting GDP to grow by around 3% in both 2015 and 2016.

However, underlying this robust aggregate outlook, it’s likely that New Zealand will continue to be a ‘two-speed’ economy. Strength is expected to remain underpinned by domestic demand in the main urban centres. At the same time, conditions in rural regions and among some exporters will be more challenging.

‘While the outlook for the next few years is robust, many of the current drivers of growth will fade over time,’ he writes. ‘Notably, the peak in the Canterbury rebuild is rapidly approaching. In addition, the current strength in net immigration will start to dissipate when job markets offshore eventually improve. As this occurs, economic growth will slow from 2017.

‘We have always argued that the economy will run out of steam once the Canterbury rebuild begins to fade. It now looks as though that inevitable slowdown will occur before inflation rises to levels requiring OCR hikes. Some in financial markets have suggested that the OCR could be cut as early as this year. That is certainly a possibility – we’d give it 40% odds. But the strong economy and low inflation really do leave the Reserve Bank between a rock and a hard place. We find it more likely that the Reserve Bank will wait until the rampant housing market has cooled and the economy has slowed before cutting the OCR. That could be years away.’

The Westpac report also offers an alternative explanation for the rampant housing market in Auckland, which some franchisors believe is diverting funds away from business investment.

Read the full report here.

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