Speedy economic growth predicted

JAMES WEIR
Last updated 05:00 13/03/2014

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The economy will grow 4.5 per cent this year, the fastest pace in a decade, but the Reserve Bank will lift official interest rates to 5.25 per cent by early 2016, according to Infometrics forecasts.

The Reserve Bank is expected to kick off an extended run of rate rises today, moving the cash rate up from 2.5 to 2.75 per cent, given the strength of the economy and the tightening labour market.

Infometrics is expecting the cash rate to move up 150 basis points in total this year to 4 per cent. The cash rate would then go to 5.25 per cent in the following year, a total of 275 points. That is much more than the 200 basis points of rate rises during two years assumed by the Reserve Bank in December.

The economic indicators this year were likely to be "almost universally positive", making it relatively easy to justify its interest rate rises, Infometrics' latest forecast report says.

The only main set of numbers that would be softer this year was in the housing market. The Reserve Bank's speed limits on low-deposit loans, imposed in October, were hitting house sales volumes and would lead to slower price growth this year. But the softness in the housing market would be outweighed by other positives and would not put off the Reserve Bank from raising rates.

At 4 per cent by the end of this year, the official cash rate would be back to only a "neutral" level, neither speeding up nor slowing the economy. But the strength of the economy would demand an even higher rate.

The coming rate rises were already priced into the present level of the New Zealand dollar, and the currency would probably drift lower as overseas central banks got closer to raising their own interest rates.

Infometrics says the last time the economy grew as strongly as 4.5 per cent was in 2004 when Don Brash was National Party leader, and China was a smaller export market for New Zealand than Japan. China is now New Zealand's biggest export market.

The latest Infometrics forecast of 4.5 per cent growth this year is much stronger than the November forecast of just more than 3 per cent.

The economy was growing fast on the back of strong exports and massive rebuilding work in Canterbury, which would "really ramp up this year".

While building work in Christchurch, excluding roads and drains and the like, grew almost 50 per cent in the past year, there was still a "massive" amount of work to do.

Infometrics estimates that just 8.6 per cent of the total rebuild work has been finished so far.

New Zealand had largely recovered from the 2012-13 drought and export volumes would rebound this year, Infometrics says. But it has been dry again in the upper North Island, with Waikato suffering one its driest February on record.

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However, the forecast growth in exports was not just a drought story, Infometrics says.

Dairy production capacity had been boosted, meat stocks have held up more strongly than expected after the drought, and high prices for forest products looked set to boost forestry exports Infometrics says.

That would see export volumes rise 7 per cent this year and another 5 per cent the year after.

The global economy was improving and the outlook for Chinese demand for New Zealand exports remains high, Infometrics' report says.

With rising incomes and a growing middle class there was increasing demand for higher-quality food, underpinning the massive growth in New Zealand exports to China.

Last year, China took an astonishing 34 per cent of New Zealand's dairy exports, 17 per cent of meat and almost half of forestry.

"To say that New Zealand is highly exposed to China's economic prospects is an understatement," Infometrics says.

PREDICTIONS 2014

Economic growth: 4.5 per cent

Unemployment: down to 5.6 per cent

Interest rates: rising to 4 per cent (5.25 per cent in early 2016)

Source: Infometrics

- BusinessDay

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