ASB economists see GDP growing by 3% both this year and next; reiterate view that official interest rates won't rise for next two years

ASB economists still see New Zealand enjoying "solid" overall economic growth of around 3% for each of this year and next - despite risks to the country's export trade posed by the current dry conditions, low dairy prices and soft Chinese demand.

In the bank's latest quarterly economic forecasts, chief economist Nick Tuffley said the ASB economics team remained confident of the current momentum in the economy.

"As a result, we now see annual growth as peaking in the first half of 2015. Over the coming year, we expect growth to be led by strong domestic demand, with a lift in consumer spending and construction. The export picture is a bit more challenging in the near term."

Tuffley said that strong population growth (such as New Zealand is experiencing through record high net migration) means "more people being fed and clothed".

"Employment growth is solid and interest rates are likely to remain relatively low. And, as a net energy importer, NZ is very much a winner out of the recent plunge in oil price,"  he said.

"Households will benefit from added purchasing power, though negatives for NZ are impacts on its oil extraction and exploration industries as well as weaker dairy and meat demand from oil exporting nations."

Tuffley reiterated the ASB economists' view that there will be no rise in official interest rates in this country for the "foreseeable future - or at least 2015 and 2016".

From 2016 onwards,  the economists still saw see some risk that the Reserve Bank may need to raise interest rates.

"Domestic demand has proved very robust and there is a risk the economy grows stronger than expected. A more immediate threat is the recent rebound in the Auckland property market. But, in the near term sustained housing strength would more likely be addressed by prudential tools," Tuffley said.

However, over the next six months or so the risk had, he said, swung toward Official Cash Rate cuts being a possibility, through events such as a significant enough drought or severe enough fallout from some global event.

Off the back of recent global developments, the New Zealand market was pricing in the risk of an OCR cut and would continue to do so in the near term, Tuffley said.

In the long term, though, NZ interest rates would go up. Term rates would likely get dragged up once the US Federal Reserve eventually lifted its policy interest rate.

"And in a more ‘normal’ world free of the current monetary distortions the NZ dollar would be sustainably lower than it is now, and the OCR would likely move up nearer a more neutral rate. But that is  still some time away in the ‘unforeseeable part’ of the future."

On the subject of inflation, Tuffley said a number of challenges emerged over late 2014 that had led the Reserve Bank to question its fundamental view of the inflation generation process "in a world that has changed significantly in the wake of the [2008] Global Financial Crisis".

"After some deep and meaningful soul searching, one answer came from an unexpected quarter," he said.

Extensive revisions of the country's Gross Domestic Product by Statistics New Zealand actually resulted in a weaker pace of growth being reported for the 2010-2014 period, he said.

"The new but weaker growth profile helps explains why non-tradable (i.e. domestically-generated) inflation remained subdued over 2014. In saying that, there does appear to be a shift in the relationship between growth and inflation. We do still expect the economy to grow and generate an increase in non-tradable inflation, but that this pick up will be less than previously thought. In the meantime, the plunge in oil prices will send headline inflation below 1% (the lower bounds of the RBNZ target) for much of 2015. Once the volatility in oil prices washes out of headline inflation we see the inflation settling back around the RBNZ’s target mid-point of 2%."

Tuffley said new housing construction costs continued to be one of the few areas of increasing inflation. Construction cost inflation increased sharply in the fourth quarter of 2014, and was running at an annual rate of 5.3%. In early 2013 Canterbury construction inflation peaked at 12% per annum, while construction inflation in Auckland remained reasonably contained.

"However, now it appears construction costs in Auckland are starting to catch up, with Auckland construction inflation accelerating to 7% pa. We expect nationwide construction inflation to continue at a 5% plus rate over the next year, reflecting sustained high levels of construction activity and supply constraints starting to emerge in the industry," he said.