New Zealand economy solid enough to overcome challenges, says NZIER - Quarterly Predictions, December 2016

29 November 2016

New Zealand Institute of Economic Research (Inc)
Media release 29 November 2016

EMBARGOED until 1am, Wednesday 30 November 2016
NZIER Quarterly Predictions, December 2016

Recent events have introduced more than the usual uncertainty into the economic outlook. The earthquakes, centred in Kaikoura and Seddon but reverberating throughout the country (particularly Wellington), have disrupted business activity and caused substantial damage to infrastructure and buildings. We expect the effects will be largely isolated to the regions which bore the brunt of the earthquakes.  

Offshore, the shock election of Trump as President of the United States ups the ante on global relations. There is much uncertainty over which of the many policies he flagged prior to the election he will follow through on, but markets for now have taken his surprise win in their stride.

The New Zealand economy is in good shape, which should provide a buffer against these recent shocks. Besides tourism, construction activity continues to ramp up as housing supply increases in response to strong demand. The continued surge in net migration will underpin housing demand over the next few years. We expect annual GDP growth to average over 3% over the next five years.

Inflation shows signs of lifting

The risk of deflation has subsided, with inflation expectations lifting globally. Besides the inflationary expectations of President-elect Trump’s expansionary fiscal policies, commodity prices are also recovering, partly due to reduced mining investment which will stifle supply growth over the long run.

Although annual CPI inflation here in New Zealand remains well below the Reserve Bank’s 1-3% target band, it shows signs of lifting. In particular, construction costs continue to show strong growth reflecting capacity pressures in the building sector.

OCR unlikely to go below 1.75%

Long-term interest rates globally have risen on these higher inflation expectations.

The Reserve Bank cut the OCR to 1.75% at the November meeting, and we now do not expect it will lower the OCR any further in this cycle. Inflation shows signs of lifting, and the growth outlook for the New Zealand economy remains solid.

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

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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