ASB released its latest quarterly economic forecast this morning and it makes it clear that, in its view, the economic threat posed by the country’s housing market has diminished.
Rather it states that the key risks to New Zealand’s prosperity are largely those stemming from increased global economic and political uncertainty.
ASB chief economist Nick Tuffley said the housing market is on track for a soft landing this year.
“The Auckland market was losing momentum even ahead of the most recent investor loan restrictions, but will remain well supported by continued undersupply.
“Other areas will return to a more moderate pace of price growth as construction steadily closes the gap.”
Overall, domestic economic conditions appear sunny with per-capita growth heading back to its long-run average, Tuffley said.
“Construction continues to lift to meet the needs of a growing population and a number of export sectors are performing well, including tourism and fruit.
“Dairy prices have now recovered to a level that will return most dairy farmers to profitability.”
This means ASB is optimistic about New Zealand’s growth prospects and is expecting growth of about 3.5% over 2017 and 2018.
Tuffley said they expect the Reserve Bank to keep the OCR on hold until the end of 2018 to underpin the domestic economic growth story.
“With inflation now back into the 1-3% target band and dairy prices now substantially higher, the Reserve Bank will be less concerned about the risks of inflation remaining unexpectedly low.”
But there are still plenty of risks that inflation does struggle to sustain around the 2% level over the next few years, he said.
“We expect the Reserve Bank will acknowledge the robust domestic outlook, but remain wary of the downside risks stemming from global uncertainty, the high NZD and lift in bank funding costs.”
In ASB’s view, a steady OCR will anchor short-term interest rates, but longer-term interest rates are likely to continue to increase over the coming years.
Tuffley said these lifts reflect expectations of OCR increases from 2018 and higher offshore interest rates (led by increases from the US).
“Higher bank funding costs are likely to also influence borrowing rates across all terms.”
Domestically, the economic future looks bright, but there are a few clouds hanging offshore and they appear to be the main threats to a strong New Zealand performance, he added.
“There is still a lot of uncertainty over what impact Donald Trump’s presidency will have, and the pace of rate hikes from the US Federal Reserve.
“Threats to crack down on Chinese imports would be a risk to New Zealand’s export outlook.”
But, at this point, ASB sees New Zealand as still “sitting pretty” with plenty of monetary and fiscal ammunition to deal with any unexpected slowdown.
