Here's to a less eventful year

OPINION: Welcome to a whole new year of informed guessing about what lies ahead for the economy, interest rates, the housing market, the exchange rate (definitely guessing with that one) and so on, in the field of economics, writes Tony Alexander this week.

Last year was one of the most interesting we have ever seen. It started with worries about a new depression and ended with strong rises in sharemarkets, long-term interest rates, commodity currencies like the New Zealand dollar, and, of course, house prices.

Business and consumer confidence levels also shot up and around the world, forecasts for growth got revised up substantially.

This year is probably going to be very boring in comparison – and that will be a very good thing. That is because if anything is going to jump out of the woodwork and inject high uncertainty into the year, it is far more likely to be things going bad than good.

The good is largely factored in – as seen by soaring share prices – and the bad has been not so much discounted as assumed to not occur.

These bad things which might but probably won't come to the fore include a bubble economy in China which might need greater control applied than currently thought.

Some countries could find themselves with major credit downgrades that lead to worries about other countries' ratings – Greece for instance.

Governments will be wondering each week if investors will remain willing to finance the huge deficits they have built up to avoid the depression scenario – Britain and the United States for instance.

But suffice to say, provided nothing truly horrible happens, for our economy, the year is likely to bring some reasonably positive developments. Businesses and consumers are reporting high confidence levels now, so it is reasonable to assume we will see improvements in retail spending, business capital spending, hiring, and housing.

In fact, the housing market has already improved a lot. People realised last year that our country doesn't have an over-supply of residential property but an under-supply, getting worse each month as population growth stays above average and construction takes time to reach average levels after falling to four-decade lows.

House prices are likely to rise by between 5 per cent and 10 per cent while the growth in construction gives better sales for retailers of building materials and home furnishings.

Last week, businesses responding in the NZIER Quarterly Survey of Business Opinion said they are running at above average capacity utilisation. Investment intentions have reached their highest since the middle of 2007.

EMPLOYMENT intentions have also improved to the best since late 2007. This doesn't mean the labour market is going to turn on a dime and the unemployment rate will plummet, but we have probably seen the worst in the labour market. However, it will be many months before the statistics actually catch up with what is happening.

Helping the economy recover will be not just the fiscal stimulus still flowing through, firm population growth and low interest rates, restocking and a below average dollar against the aussie, but also firm trading partner growth. Last year our top 14 export destinations shrank 1.6 per cent. This year they are expected to grow 3.1 per cent, improving to 3.3 per cent over 2011.

Their improvement is certainly not a boom, but it gives hope for a rebound in tourism over 2011 (it takes time for the sector to feel the effects of growth changes offshore), good support for manufacturers, and continued support for our export commodity prices which have risen by around 42 per cent since February last year.

Watch for the Budget in May. It will contain spending cuts but hopefully some tax changes as well, and be ready for the Reserve Bank to start raising its 2.5 per cent cash rate from the middle of the year at the latest.

That means rising floating mortgage rates and also fixed rates continuing to creep higher, though not quite at the same speed as 2009.

» Tony Alexander is the chief economist for the Bank of New Zealand.

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