New Zealand economy picking up despite offshore volatility - Quarterly Predictions, March 2016

02 March 2016

New Zealand Institute of Economic Research (Inc) Media release 1 March 2016
EMBARGOED until 1am, Wednesday 2 March 2016
NZIER Quarterly Predictions, March 2016

Economic activity picked up over the second half of 2015, reflecting growth in the non-dairy sectors. Strong population growth, construction and tourism will be the key driving forces behind solid growth for the next few years. We expect annual GDP growth to recover to around 3% over 2016, and average 2.5% for the following years.

However, the current volatility in global financial markets is a reminder of how quickly sentiment can change. Financial markets are adjusting to the realisation that the Federal Reserve will gradually normalise interest rates in the world’s largest economy. This has raised fears about the durability of the recovery in the global economy.

An independent take on the New Zealand economic outlook is available exclusively to NZIER’s members in the latest Quarterly Predictions.

Inflation remains very weak

Despite the pick-up in economic activity, inflation in New Zealand remains very weak. Lower petrol prices are playing a key role here.

However, lower petrol prices have also reduced costs for households and businesses and encouraged spending. The decline in petrol prices from a year ago represents a $200 annual boost to each household’s wallets. Although wage growth is subdued, it is still outpacing consumer price inflation, resulting in real wage growth for many households.

Putting the Reserve Bank in a difficult position

The very low inflation environment contrasts with continued strength in asset prices, particularly in the housing market. The Reserve Bank is becoming increasingly mindful of the consequences of excessively loose monetary policy on asset prices and financial stability. Its more recent communications indicate it will draw on the flexibility in its Policy Targets Agreement when setting monetary policy.

A key issue is whether the New Zealand economy has enough momentum to ride out the uncertainty in the global outlook. The supports for growth in the New Zealand economy remains intact, but the offshore volatility present downside risks. Balancing all these factors, we expect the Reserve Bank will leave the OCR on hold at 2.5% over 2016 and much of 2017.

For further information please contact:
Christina Leung, Senior Economist & Head of Membership Services
christina.leung@nzier.org.nz, 021 992 985

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