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27-05-2014

Better growth, rising risks

NZIER Media Release

The New Zealand economy has been recovering from the recession. But slumping house sales are a significant risk to our optimistic outlook for the economy.
House sales, which lead economic growth by around six months, have slumped by nearly 20% in the last six months (Figure 1).

We expect the economy to grow by 3.5% in 2014. This growth is being driven by increased spending and investment by households and businesses. The Canterbury rebuild remains a prominent feature, although economic growth is broadening to more regions. The impact from last year’s drought was also less than in 2008, and is now boosting rural growth.

Detailed commentary and forecasts for the next five years are available exclusively to NZIER members.

Housing and global risks

Auckland house prices have surged to record highs. Investor demand is driving the Auckland market. In an investor-driven market, sales and prices can turn rapidly. A sudden stop in house sales could make banks more careful in lending. That would put the brakes on broader economic growth.

Slowing growth in China is another risk. New Zealand exports over 20% of its exports to China. The indirect links through Australia and other countries exposed to China may be even more important, particularly for exporters outside of dairy, meat and forestry.

Pause in interest rate hikes

The RBNZ has been raising interest rates. Further hikes are likely to cool the Auckland housing market. A pause in hikes is possible after June, if the economy slows too quickly. The RBNZ will be wary of causing a housing bust in the provinces and sectors outside of Auckland housing, which are not overheating (Figure 2).


 

 

For further information please contact:
Shamubeel Eaqub
Principal Economist
021 573 218
Shamubeel.Eaqub@nzier.org.nz
 

Source: NZIER Media Release

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