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NZ economy to accelerate, even as world soft

NZPA

Tuesday 26th July 2011

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New Zealand economic growth will accelerate in the next year or two, despite the global economy hitting a soft patch, Westpac's latest quarterly economic review says.

Westpac chief economist Dominick Stephens said it was not unusual for growth in New Zealand to decouple from the global cycle.

He pointed to 2001 and 2002 as an example when New Zealand enjoyed high growth while the global economy merely puttered along.

"And the tables were turned last year, when we languished while the global economy steamed ahead," he said.

"Being small, the New Zealand economy is sometimes buffeted by idiosyncratic developments such as local climatic conditions."

The review, published today, said New Zealand's economic recovery gained momentum in recent months, supported by high commodity prices, low interest rates and increasing confidence.

While earthquakes in Christchurch had caused massive damage, the disruption to national economic activity had been more limited than initially feared.

The drivers of expected rapid acceleration in growth next year would be quite different to those of the past decade, with debt accumulation playing a lesser role, the review said.

One of the most obvious drivers would be the mammoth rebuilding task in Canterbury, which was set to dominate New Zealand's economic growth profile in coming years.

Westpac economists expected residential building activity in Christchurch to begin in earnest next year, with non-residential construction ramping up in 2013.

Infrastructure repair and replacement, which made up a significant chunk of the $15 billion-plus expected spend in Canterbury, was expected to grow strongly for a number of years.

Residential building was expected to spread beyond Canterbury, after prolonged weakness in activity meant the supply of houses had not kept pace with population growth.

Imports of capital equipment had also soared since the start of the year, after underinvestment during the prolonged recession, the review said.

"And with interest rates low, finance availability much better now than in recent years and the strong New Zealand dollar making importing capital an attractive option, conditions are ripe for substantial increase in investment."

While high commodity prices were expected to soften in the second half of the year, in the medium term upward pressure would go on food prices as increasing demand for food globally outpaced rises in supply.

Despite the optimism about the New Zealand economy, the review noted international developments were providing a headwind.

The outlook for the Australian economy had deteriorated, and this country's tourism sector was sure to feel a chill wind as a result, the review said.

Fortunately the Rugby World Cup should provide a much needed fillip in the second half of the year.

Despite improving job prospects, households would be squeezed by rapidly rising interest rates and a return to zero house price inflation in 2012.

"Solid wage growth should allow households to both continue to modestly increase spending but also reduce debt."



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