Stage set for 'rock star' NZ
Effective full employment, a booming housing market and a dollar worth more than Australia's? Not an election slogan, but rather a remarkably bullish assessment by a bank economist of New Zealand for 2014.
Paul Bloxham, HSBC Bank's chief economist for Australasia, doesn't see the upcoming election or a flagged rise in interest rates as reason to alter his forecast for golden weather.
"It's not enough to stop New Zealand being the rock star economy of 2014," he says.
After hobbling since the start of the global financial crisis in 2007, Bloxham is picking the New Zealand economy to expand by 3.4 per cent this year sparked by a step-up in the Canterbury rebuild and surging global demand for dairy products.
If achieved, such a result would place New Zealand in rarefied company in the OECD. Bloxham says only Chile, Mexico and Israel were likely to compete with New Zealand for the rock star crown.
He says these trends, coupled with a slowdown in Australia, will see the gap closed with our nearest neighbour.
"The biggest difference right now is that Australia is at the end of its mining and energy boom, and New Zealand is just at the beginning of the Canterbury rebuild boom," Bloxham says.
The scale of investment into Canterbury - estimated to be 20 per cent of GDP - is comparable with the 25 per cent Australia invested into mining during their recent boom, he says.
Kim Campbell, chief executive of the Employers and Manufacturers Association, reckons Bloxham's assessment is spot on.
"I would totally agree with him. The vectors for New Zealand haven't been as positive as this, certainly for 20 years, and it might be ever," Campbell said.
Campbell's also in agreement that Australia is on a relative decline, granting a rare opportunity to catch up.
"If you were asked make a bet right now, I'd back New Zealand over Australia - at least for the next 18 months," Campbell said.
Bloxham admits it might not all be plain sailing, especially as his projections are chiefly based on a high exposure to dairy markets which could quickly sour.
"There is of course a risk, but I would turn it on its head: I think New Zealand's very fortunate to have an industry that's doing so well. You can't have it both ways," he says.
Grumbling by exporters over the strength of the dollar could turn into open rebellion at the election this year if Bloxham's predictions hold true.
The Reserve Bank's Trade-Weighted Index shows the Kiwi has appreciated nearly 40 per cent over the past four years and Bloxham reckons this trend will only accelerate.
This strengthening will be particularly pronounced with the Australian dollar cross, which Bloxham expects will reach symbolically important levels.
"We have in our mind that New Zealand will achieve parity with Australia this year," he says.
Parity with Australia has proved elusive, with veterans in the currency field telling stories of several planned parity parties over the past few decades that saw the Champagne remain in the fridge.
"You might get to pop the Champagne one day this year, but then you will have the hangover the next day," Bloxham says.
John Walley, chief executive of the NZ Manufacturers and Exporters Association, says the dollar's current price of 90c Australian has already left the sector with a sore head.
"The currency is such that it's painful. I know very competitive high-tech firms who will be writing zero profits even in the mid-80s. Either you accept that and the shareholders say ‘We'll hang in here, spend off the balance sheet, or subsidise it,' or they'll quit New Zealand, sell or close down."
Walley accepts Bloxham's reading of the economy, but thinks hard questions need to be asked at the General Election.
"I agree with his analysis - but it's a projection of what happens if thing stay as is. We need to be asking ‘Is this good for NZ Inc?'"
The unemployment rate peaked, according to Bloxham, 18 months ago at 7.1 per cent. He says the coming boom will add significant numbers of new jobs, particularly in construction in Christchurch.
"We think employment growth will pick up, we think the labour market will tighten. We have the unemployment rate falling to 5.2 per cent by the end of the year - that's pretty much full employment," he says.
Kim Campbell says the signs are already there that 2014 will be a bumper year.
"New Zealand has this permanent melancholy that really doesn't want to believe how great it is. The problem is that it isn't for everyone, but for many New Zealanders we've never had it so good."
The relative decline of Australia would help reverse the brain drain across the Tasman and help to partly ease the labour market, Campbell says.
"It has slowed, the numbers are reversing - people are coming home."
Campbell agrees that 5.2 would represent "full employment" and says more needs to be done to ensure that the fruits of the economic golden weather a distributed more evenly.
"Lots of people are complaining about skills shortages - yet there's quite high unemployment," he says.
"Policy settings have to be directed towards continuing to upskill and maybe even thinking about where the unemployment exists - it isn't across the board."
Real national median house prices have recovered and are now sitting at pre-crash levels. Bloxham picks a budding boom, particularly pronounced in Auckland and Christchurch, to continue.
"The Reserve Bank efforts to slow it down with Loan-to-Value Ratio limits have largely come to nothing," he says.
Despite the LVR policy cutting out some first home buyers, demand for housing would remain robust as the cost of borrowing money remained historically cheap and migrants continued flow in, Bloxham says.
On the supply side the Christchurch rebuild, beginning to hit high-gear, would add to building costs and may stretch the local market to its limits.
"One of the key risks to inflation is that there's such a concentration on Christchurch that demand may soon run well ahead of supply and there may not be the resources to do all the construction required," Bloxham says.
Helen O'Sullivan, chief executive of the Real Estate Institute of New Zealand, wasn't so sure that LVR limits were proving futile.
"We're waiting to see whether it's a process issue - whether getting a loan now takes longer and sales have been delayed - or if those first-time buyers have dropped out of the market entirely."
Signals by the Reserve Bank that inflation is on the march and rise in interest rates may be inevitable will not derail house price growth, O'Sullivan says.
"The word I'm after is not dampening, but it will temper some of the enthusiasm. Even adding a percent to the rates we're seeing at the moment it's still, historically-speaking, extremely low."
Last year the Reserve Bank warned the official cash rate could rise to 4.75 per cent in the next two years, up from its present low of 2.5 per cent.