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New Zealand's economy firing on all cylinders, HSBC says

Tuesday 24th January 2017

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Growth in New Zealand is tipped to remain strong but rate hikes won't be on the cards until 2018, says HSBC chief economist Paul Bloxham.

"Our view is that the economy is now firing on all cylinders. You have a strong construction story, strong tourism and the dairy story is no longer a drag and is actually looking like it's a contributor," he said today when presenting a report on New Zealand in 2017. 

HSBC is expecting the economy to expand 3 percent in calendar 2017, following on from 3.2 percent growth in 2016. Bloxham said New Zealand's growth trend was 2.5 percent.

As rebuilding activity starts to wane in Canterbury, building work is expected to continue to grow quickly in other parts of the country in response to strong population growth, Bloxham said. He underscored 2017 will be another good year for tourism. Among other things, the British and Irish Lions rugby union tour during June and July should see an influx of visitors from the UK – a traditionally strong market that has experienced fairly lacklustre growth in recent years. Rising dairy prices has removed a key downside risk, although Bloxham noted export volumes may still be a drag on growth given cutbacks in the sector. 

He noted the main policy challenge has been low inflation and the key question is whether the current strong growth will deliver a pick-up in inflation. "We are of the view it will," he said. Higher fuel prices are expected to have pushed New Zealand’s annual inflation back above 1 percent for the first time in more than two years in the December quarter. Among other things, stretched capacity in the construction sector and slowing inward migration, as the situation improves in Australia, should see a lift in wage pressure.

However, while he said domestic inflation is probably past its trough "it won't be enough to warrant an interest rate lift until early 2018." The central bank will be cautious and will need to be "very convinced" that not just inflation but inflation expectations are headed higher before it lifts rates. The fact that governor Graeme Wheeler's term is up in September and that it's a general election year will also complicate things for monetary policy, Bloxham said. "These uncertainties could lead to more stable (or less active) monetary policy than would otherwise be the case," he said. 

Regarding global risks, Bloxham said there is considerable uncertainty about what US President Donald Trump might deliver, but in broad terms, he said he expects the Trump administration to be positive for US growth. Inflation will push higher and the Federal Reserve will be on a continued path of lifting interest rates. That will lead to a stronger US dollar, which benefits both Australia and New Zealand as export economies. 

The Trump administration's expected move toward greater protectionism points to some "significant downside risks to the outlook for global trade," said Bloxham. On Monday in the US, Trump formally ordered the US to withdraw from the Trans-Pacific Partnership trade deal and is also reportedly preparing to renegotiate the North American Free Trade Agreement.

However, New Zealand's strong trade ties to Asia should stand it in good stead. "Although it looks as though the trade barriers may very well rise between the US and the rest of the world, if we can make sure that we have a stronger trading relationship with our major trading partners, we could actually benefit from this story," he said.

"There are winners and losers in this scenario. The winners are the ones that manage to keep their doors open to their major trading partners," added Bloxham.

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