The economic recovery is past its peak - Quarterly Predictions, September 2014 - media release

Embargoed Until 1:00AM, Wednesday 27th August 2014

27 August 2014

New Zealand Institute of Economic Research (Inc)
Media release

NZIER Quarterly Predictions, September 2014

Economy past its peak so interest rates on hold until 2016

The economic recovery is past its peak. The New Zealand economy grew strongly through the first half of 2014, but the pace is slowing. Economic growth will ease from 3.5% in 2014 to a still respectable 2.7% in 2015. Rising interest rates are biting, as seen in falling house sales and waning confidence. More uncertain global demand casts a shadow over the outlook.

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

Underlying normalisation: the seven-year retail famine has ended

While some parts of the economy are easing, there is also an underlying and gradual recovery underway. Spending and investment behaviour is gradually returning to normal, but it has not been accompanied by households and businesses gorging on debt as seen in previous cycles. That makes this recovery more sustainable.

Hiring is improving and retail spending is back to pre-recession levels. To retailers’ relief, the seven-year post-GFC famine has ended.

Lumpy and wobbly recovery

But the good news is tinged with caution.

For example, hiring is improving, but the spoils are unevenly shared across regions and industries. Auckland has gained nearly 70% of the new jobs since the pre-recession highs, Canterbury 20% and the remaining 10% spread thinly across the rest of New Zealand. Professional services and health sector employment have surged, but gains are more gradual in other industries. The manufacturing sector continues to shed jobs.

The rather lumpy and wobbly recovery, both in terms of speed and composition, means that this recovery is still elusive to many industries and regions. This in part explains why inflation is still subdued and is likely to remain so for some time.

RBNZ should hold until 2016

The RBNZ raised interest rates earlier this year to cool the housing market. It is working: house sales are falling sharply and borrowers are moving to fixed mortgages in droves.

The RBNZ has paused to assess and should not raise interest rates again until there is convincing evidence of strong and sustained economic growth and rising inflation to well over 2.5%. We do not see that happening until early 2016.

For further information please contact: Shamubeel Eaqub on 021 573 218.

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