Welcome to the boom of 2014

21:53, Dec 28 2013

Financial experts are united - next year could be a golden one for the New Zealand economy with all signs pointing to a prosperous 2014.

Commodity prices are booming, businesses are at their most confident in 20 years, the economy is among the world's fastest growing, jobs and wages are predicted to rise and that confidence is filtering through to consumers who are starting to open their wallets.

New Zealand's GDP growth was at its highest in four years in the last quarter at 3.5 per cent on the previous year - higher than Australia (2.3 per cent), the US (1.8), Britain (1.5) and Japan at 2.4 per cent.

Compared with Australia, once our largest trading partner but recently overtaken by China and whose economic growth outside the mining sector has relatively flatlined, our positive outlook is more stark.

However, living up to their billing as experts in the dismal science, economists are also quick to warn against overconfidence, pointing out that no boom lasts forever.

NZIER principal economist Shamubeel Eaqub said the story for next year was "generally . . . very positive" with the economy likely to be at its strongest since 2007 - the year before the recession.


The outlook was driven by "one-offs" like the massive post-drought lift this quarter, the $40 billion rebuild in Christchurch and more fundamental pillars such as record commodity prices and increasing business and consumer confidence.

ASB bank chief economist Nick Tuffley said New Zealand would experience one of its best years "for quite some time" but the economic gains would not mean a massive boost for average Kiwis.

Employment growth would increase somewhat, leading to more competition for staff and pushing wage growth up slightly over time to about 3 per cent.

"So there's collectively a slightly better income story for households."

That wage growth was likely to be stronger in the construction sector and those which support it, especially in Auckland and Christchurch where most of the building will be focused.

The improving economy was also reinforcing itself by attracting high numbers of immigrants and, coupled with rising house prices making people feel wealthier, there were more people spending more money.

While people were increasingly happy to spend more, however, it was not like the the 1990s and early part of this century when New Zealand's strong period of growth was partly funded

through increasing household debt - consumers were now more prudent.

"What we've been seeing is a degree in pick up in retail spending but it's one that's still remaining prudent - we're all still being a bit careful."

The Government and economists are warning Kiwis not to get overconfident.

Westpac economist Felix Delbruck said construction booms had a habit of lasting a few years before winding down "and that's kind of even more certain this time than normally because a lot of it is just to replace stuff that was damaged or destroyed in an earthquake".

They were expecting the construction boom to peak by about 2015 and, with rising interest rates to help curb inflation, people needed to be cautious.

"I think the message there is to be a little bit cautious in thinking about what's going to happen over the next few years," he said.

The growth is expected to force the Reserve Bank to push up rates from early next year - which would make it the first central bank in the developed world to do so since the financial crisis, meaning higher interest rates for borrowers.

Delbruck said much of that forecast rise had already been factored in to fixed rates so it was difficult to say whether people should fix their rates.

"Basically the interest rate rises that we're expecting, they're now baked into fixed-term mortgage rates, so you're not going to save money by doing one or the other, really. It's just how much risk you want to take on."

Wage growth is also expected to be partly offset by inflation but Delbruck said it would not be "roaring away", with a forecast inflation rate of about 2 per cent by early 2015 or about the midpoint of the Reserve Bank's target range.

While house price inflation is expected to have peaked, Eaqub said the one threat to prosperity was the Auckland housing market where house prices are among the highest in the world relative to rents and incomes.

The Reserve Bank's new loan to value restrictions had made the market more uncertain and, coupled with rising interest rates, were threatening to cause a drop in house prices.

"If house prices fall there is a lot of uncertainty about what impact it will have on the Auckland economy and if there will be any spillover to other parts of New Zealand mainly because so much of the economic recovery had been concentrated in Auckland and also Canterbury more recently."

Homeowners, especially new ones in Auckland, had to be careful to ensure they could manage repayments in the shadow of rate rises and the possibility of falling house prices.

"You should be budgeting and you should be living within your means regardless, and saving for retirement because, in time, we may not get the relatively generous welfare system that we have in New Zealand."

Sunday Star Times