Dropping rates should boost slow growth

There will be a slow start to 2016 for New Zealand’s economy – which adds to the case for further OCR cuts, according to ASB.

Tuesday, February 16th 2016, 10:08AM

by Miriam Bell

In its quarterly economic forecasts, released today, the bank predicts economic growth will continue to slow in the first half of 2016, bottoming out at 2.2%.

This is due to the drag from weak dairy prices and slower construction growth, which is being disguised by record high net migration.

Last year there was population growth of 2%, which is twice the historical average rate.

ASB chief economist Nick Tuffley said population growth is accounting for much of NZ’s growth at present.

“On a per-capita basis, there has essentially been no economic growth over the past year.”

This means that, while the drag from low dairy incomes is there, it is simply hidden by all the extra people and confined largely to the regions.

However, rocky global factors aside, New Zealand’s economic outlook is quite reasonable, according to the forecasts.

While falling dairy incomes remain the main economic headwind, tourism is proving to be a star, with strong growth in visitors and in per-person spending.

Tuffley said declines in interest rates and the NZD over the past year will help to support growth, which should stabilise, then recover over 2016 and 2017.

Low inflation remains a concern and, for this reason, ASB’s economists do expect the Reserve Bank to cut the OCR again – despite its reluctance.

“Further rate cuts later this year should provide an extra boost to growth, ensuring inflation lifts more firmly back into the Reserve Bank’s target,” Tuffley said.

If the bank’s expectation of two more OCR cuts proves correct, short-term rates should decline from current levels over the coming months, the forecasts said.

Meanwhile, the housing market remains a key uncertainty over the coming year for ASB.

New tax and LVR restrictions, introduced last year, initially appeared to be having an impact in Auckland. 

But ASB’s economists think there are some early signs that the initial slowdown may have been a knee jerk reaction.

This is because sales are starting to lift again and there is a limited amount of listings, which is keeping Auckland’s market conditions very tight.

Conversely, the heat has come out of the housing market in Canterbury, ASB said.

Rental demand has fallen as residential rebuild work has peaked, supply shortages have now abated, and prices seem to be settling.

Tags: ASB Mortgage Rates OCR OCR forecasts RBNZ

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