'Brakes finally off' for Kiwi economy

Last updated 05:00 11/12/2013

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The economy is starting to bloom after many false starts, and the job market is showing signs of life, according to a planning forecast by Business New Zealand.

The planning forecast's Economic Conditions Index, which tracks 33 indicators, is up 9 points in the last three months to sit at 14 points for the December quarter.

The index is a measure of indicators such as gross domestic product, export volumes, commodity prices and inflation, as well as confidence figures.

The index slumped as low as -20 after the global financial crisis hit in 2008. It has bounced up briefly to +10 points three times since then, but the recovery was not sustained.

Now economists are picking growth to average about 3 per cent a year for the next couple of years, making New Zealand one of the fastest-growing developed economies.

Business NZ said New Zealand was seeing its best terms of trade in 40 years.

Agriculture was strong despite the drought earlier this year. In the September quarter dairy product prices jumped 24 per cent to their highest levels since 2008.

New Zealand's major trading partners, especially China, were sucking up export commodities and that was reflected in high prices.

Good growing conditions over spring should also make for a bumper 2013/2014 season, Business NZ said. Fonterra's decision to lift the projected milk payout to $8.30 a kilogram was just another part of the positive jigsaw for agriculture.

Surveys of manufacturing and services showed both are expanding, suggesting economic growth was heading above 3 per cent.

Business NZ economist John Pask said the labour market was finally showing signs of life, with some forward-looking indicators pointing to employment growth.

"The OECD places New Zealand as one of the fastest growing economies in the developed world. It seems our economy is finally starting to thrive, and the dividend of more jobs will be welcome."

The unemployment rate is expected to fall to 5.1 per cent by the end of 2015, compared with 6.2 per cent now.

Consumers were increasingly opening their wallets on the back of an improving housing market and better job outlook.

The Organisation for Economic Co-operation and Development had forecast growth of 3.3 per cent in 2014, compared with an average of 2.3 per cent for the average in the OECD countries.

Despite all the positives the potential risk of inflation should not be downplayed in light of the strong housing demand, especially in Auckland and Christchurch. Rapidly rising net migration would also put more pressure on an already stretched market, Business NZ said.

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Farm debt is high and rising, at more than $50 billion, with about two-thirds of that focused on the dairy sector.

Household debt levels were also rising again and could come back to haunt some people as debt servicing costs rise with interest rates next year.

"After getting debt down to more manageable levels post the global financial crisis, the brake has now to some extent been released," Business NZ said.

There was an increasing risk of significant and relatively rapid rises in the official cash rate as the Reserve Bank tried to control inflation next year. Rising interest rates could dent consumer confidence when interest rate rises start to bite.

A high proportion of home loans are on floating or fixed rates of less than a year, so the impact of rising official interest rates would flow through quickly. Fairfax NZ

- BusinessDay

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