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New Zealand still has 'rock star economy', says HBSC chief economist Bloxham

09 Apr 2015

HSBC chief economist Paul Bloxham, who first coined the phrase 'rock star' in January last year to describe New Zealand's economic growth, says it's still a rock star despite lower dairy prices and slower growth in its major trading partners.

In an Asian economic quarterly report out today, Bloxham said a range of indicators show the New Zealand economy continues to be supported by a construction boom, with 15 out of 16 sectors that contribute to gross domestic product growth showing expansion over 2014. Overall GDP growth was also running at well above-trend at 3.5 percent year on year.

Other economists have moved on from the term rock star to 'goldilocks' economy, forecasting steady growth for New Zealand.

The New Zealand dollar has reached near parity with the Australian dollar for the first time in 42 years and there were some early signals that domestic price pressures are picking up. Bloxham said that indicates the Reserve Bank is unlikely to cut rates this year, in contrast to current market pricing and despite New Zealand having much higher interest rates than the rest of the world.

'In contrast to current market pricing, which suggests the Reserve Bank is likely to cut rates by Q3 this year, we still think they are more likely to remain on hold," Bloxham said.

Domestic factors are largely driving the economy with the post-earthquake rebuild of the Canterbury region still ramping up and strong population growth supporting an upswing in Auckland residential construction. The building boom is creating jobs with employment up 3.5 percent year on year which is boosting incomes and confidence and supporting increased spending, Bloxham said.

Concern by kiwi policymakers about the high level of the NZ dollar and its impact on exporters was surprising, he said.

"Much of that data do not support these concerns. Growth is strong and broad-based. The exchange rate sensitive exports, such as manufactured goods and tourism services, are performing well despite the high currency," he said.

Bloxham admitted the strong currency has been a key factor in the current low inflation below the bottom edge of the Reserve Bank's 1-to-3 percent target band. Inflation is expected to fall from the current 0.8 percent for the December quarter towards zero for the first quarter of this year due to the oil price fall. But this was good, not bad disinflation, he said.

"With GDP and employment growth above trend, low inflation is a bonus, as it also helps improve living standards," he said.

Bloxham forecasts domestic inflation will start to rise soon given the economy is still growing strongly and spare capacity is being absorbed. The petrol price impact is temporary and should drop out of the picture by early next year.

Earlier today the ANZ said New Zealand's economy looks set to truck on as long as offshore events don't spoil the party with more modest GDP growth of around 0.5 to 0.6 per cent in the first quarter compared to the previous one. It's monthly ANZ Truckometer measures economic activity using real-time traffic data and its heavy traffic index fell 0.4% in the month of March, but is up 0.8 percent in the first quarter of the year (seasonally adjusted). The ANZ Light Traffic Index which leads GDP by six months was flat in March, though is up 1.6 per cent in the first quarter.

ANZ economists said they were expecting a drought impact on GDP in the first half of the year but still anticipate a "reasonable" quarter one number.

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