Recovery past its peak as interest rates bite

20:44, Aug 26 2014

The Reserve Bank should keep official interest rates on hold for more than a year, until 2016, according to NZIER's latest quarterly predictions.

The economic recovery is past its peak and rising interest rates were biting, NZIER said.

The recovery was still "lumpy and wobbly", with new jobs mainly in the main centres, while the manufacturing sector was still losing jobs.

"This recovery is still elusive to many industries and regions," the Institute of Economic Research said. That in part explained why inflation remained so low and was expected to stay down for some time.

But the seven-year post-global financial crisis "famine" for retailers had ended, with shop spending back to pre-recession levels.

NZIER forecast growth would ease from 3.5 per cent this year, to a "still respectable" 2.7 per cent next year.


"Rising interest rates are biting, as seen in falling house sales and waning confidence," NZIER said.

The Reserve Bank raised the official cash rate four times this year to cool the housing market. It is now at 3.5 per cent.

"It is working: house sales are falling sharply and borrowers are moving to fixed [rate] mortgages in droves," NZIER said.

The central bank should not raise rates again till there was evidence of strong and sustained growth and inflation rising to well over 2.5 per cent.

"We do not see that happening until early 2016," NZIER said.

Most economists are expecting the central bank to start lifting interest rates again late this year or early next year.

NZIER said while some parts of the economy were easing back, there was also an underlying and gradual recovery elsewhere.

Spending and investment patterns were returning to normal, though gradually. But that had not led to households and business "gorging on debt" as seen during past recoveries.

"This makes the recovery more sustainable," NZIER said.

Hiring was improving and shop spending was back to levels see before the recession.

But the spoils of new hiring was not evenly shared. Auckland has gained almost 70 per cent of the new jobs since the pre-recession highs, with Canterbury 20 per cent. The other 10 per cent was thinly spread elsewhere. Professional services and health sector jobs have surged, but manufacturing had gone backwards.

This week, Westpac chief economist Dominick Stephens said New Zealand's recent growth had been fuelled by the Canterbury rebuild, low interest rates and a surge in net migration, which hit a 10-year high in the year to June. "When the Canterbury rebuild ends people will be quite surprised by the size of the downturn."

Stephens said the strong net migration, which has been largely due to fewer New Zealanders moving to Australia and greater numbers returning from across the Tasman, is unlikely to continue at current levels for long.

"Australia will one day make a comeback. We are forecasting zero net migration for 2018. And one day interest rates will get big enough to crush the housing market," he said. "My fear is all three of those things will happen at the same time."

ANZ senior economist Sharon Zollner said a soft landing for the economy was unlikely to happen.

"People say the New Zealand economy has three gears: first, fifth and reverse. For us to engineer a soft landing and have that Goldilocks profile for a while is unusual," she said.

The Dominion Post