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ECONOMY IN A SWEET SPOT

by Simon Lord,
last updated 22/02/2017

in this article:

22 February 2017 ­– Latest Economic Overview suggests continuing good news for now

Westpac’s Acting Chief Economist Michael Gordon says that New Zealand finds itself in something of a sweet spot right now. ‘The economy has been growing at a steady pace for some time, and a strong pipeline of building work and an improvement in dairy prices will help to keep that momentum going,’ he comments in his introduction to the bank’s latest Quarterly Economic Overview

The report finds that the New Zealand economy finished 2016 on a high note. ‘We estimate that GDP growth reached 3.3% for the year, with standout contributions from building activity, consumer spending and business services. The country is now entering its seventh year of sustained growth. The damage wrought by the Global Financial Crisis is becoming more distant, and activity has now returned to around its non-inflationary potential. We expect annual GDP growth to top 3% over the next couple of years, as a wave of building work progresses and higher dairy prices provide some relief to rural regions. Inflation is no longer at rock bottom levels, and looks set to stay within the Reserve Bank’s target range for the foreseeable future.’

At the same time, says Mr Gordon, the economy doesn’t look at risk of overheating. ‘New Zealand’s growth rate is partly a reflection of unusually strong net migration. With both new arrivals and returning Kiwis being skewed towards those who are ready and able to work, these people add to the economy’s growth potential as well as demand. That said, there are areas such as homebuilding where an adequate supply response clearly requires more than just more workers.

‘Another factor working against overheating is that longer-term interest rates are now on the rise, which may already be acting to cool the housing market. In some respects this is a positive development: economies are meant to have self-regulating mechanisms, even if in the past they’ve tended to work less well than they should in theory.’

New Zealand also stands out as a strong performer within a difficult global environment, though the country is by no means isolated from what happens elsewhere. ‘Last year’s events such as the Brexit vote and the election of President Trump were startling enough, but 2017 is the year in which the consequences of those choices will begin to be felt. The direction of US economic policy in particular remains largely unresolved.’

Of course, 2017 is election year in New Zealand and Westpac believe it could be a close one, with a stronger economy providing more scope for campaign promises than we have seen for some time. In addition, the Reserve Bank Governor’s departure could be used as an opportunity for some changes in the RBNZ’s focus. In a special focus, the Overview highlights areas where the policy mix could take on a different complexion by the end of this year.

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