Full steam ahead for growth, BNZ says

JAMES WEIR
Last updated 05:00 21/03/2014

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The economy is in a "sweet spot" and will get even stronger after growing 0.9 per cent in the December quarter, but interest rates will keep rising, say Bank of New Zealand economists.

Some economists now expect annual growth to top 4 per cent this year.

Statistics New Zealand figures out yesterday showed the economy steamed ahead in the last three months of 2013, boosted by strong growth in manufacturing and wholesale trade, as well as a big lift in business investment.

The economy is riding the wave of high dairy-sector returns and the best terms of trade in 40 years, the Christchurch rebuild, and strong net migration. However, farm production was slightly weaker in the December quarter after a massive rebound in milk production in the September quarter following last summer's drought.

Manufacturing slumped after the global financial crisis and exports have been hit badly by the high NZ dollar. But overall manufacturing is now back to its highest levels since 2006, yesterday's gross domestic product figures show, with only textiles lagging.

The sector has been getting a strong tailwind from the Canterbury rebuild and Auckland property boom.

Most economists think the Reserve Bank will lift official interest rates again in April, after last week raising them from 2.5 per cent to 2.75 per cent.

Official interest rates are now headed for 4.5 per cent late next year, as the central bank tries to keep a lid on inflation as the economy hits its best growth patch for a decade.

BNZ economists are picking annual growth to hit a peak of 4.3 per cent by the middle of this year and it could be even stronger, with official figures due out just days before the general election.

Said Finance Minister Bill English: "Providing we stick with the government's successful programme, New Zealanders can lock in the economic gains we're starting to see through more jobs and higher incomes."

With investment in plant, machinery and equipment up 7.5 per cent in the December quarter, English said firms were investing for the long-term to support productivity and higher wages".

But the Council of Trade Unions said that, while there was economic growth, the big question was "who will benefit?"

"We have yet to see the results in sharply falling unemployment and good wages growth," CTU economist Bill Rosenberg said.

Unemployment remains at 6 per cent and has been sticky at between 6 per cent and 7 per cent in the aftermath of the global financial crisis.

However, jobs picked up strongly in the second half of last year, rising by 24,000 in the December quarter alone. The Reserve Bank expects another 100,000 new jobs in the next two years.

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But Rosenberg said wages were stagnating, workers were not getting a fair share of the growth, and some household could barely afford to pay for necessities such as groceries and electricity.

Yesterday's figures showed household spending on durable goods such as furniture and appliances, clothing and televisions, jumped 7.4 per cent in 2013, the highest annual increase since 2005.

Economic gains

December quarter: 0.9 per cent (September quarter, 1.2 per cent)

Annual growth: 3.1 per cent (September year, 3.3 per cent)

Key drivers in December quarter

Manufacturing activity: up 2.1 per cent, driven by increases in food, beverage, and tobacco, and machinery and equipment.

Manufacturing activity is now at its highest level since March 2006, despite the headwind of a high NZ dollar.

Manufacturing has come off a low base, but is getting a strong boost from construction work, such as the Christchurch rebuild

Wholesale trade: up 3.2 per cent, including machinery and equipment wholesaling

Household spending on durables such as furniture and appliances up 2.6 per cent (7.4 per cent for year)

What next?

Strong growth to continue this year, possibly peaking above 4 per cent.

Economists' average forecast for 3.6 per cent growth in the year to March 2015.

The Reserve Bank will lift official interest rates to 4.5 per cent by later next year, with a move in April seen as a done deal.

Source: Statistics NZ & bank forecasts

- BusinessDay

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