Sustainable recovery under way

Auckland’s overvalued housing market and flattening worldwide growth are key risks to the Kiwi economy, which is slowing to a more sustainable pace, says the chief economist at the New Zealand Institute of Economic Research (NZIER). Annual economic growth will average 2.5 per cent over the next five years, according to its quarterly predictions. With little domestic and global inflation, the institute sees no reason for the Reserve Bank to raise the official cash rate until 2016. Shamubeel Eaqub says: “The economy is growing, but pace is moderating. One-off boosts are fading, but there’s a durable underlying recovery taking place that isn’t built on fickle borrowing.” The NZIER expects the boost from Christchurch’s rebuild to peak in early 2015. The rural recovery after last summer’s drought, which stimulated growth at the start of 2014, is largely over. Eaqub says more moderate and sustainable activity underpins economic growth, generating jobs and income growth. The institute’s views come after the central bank’s survey of expectations found Kiwi businesses have trimmed expectations for inflation over the next two years. They have cut their predictions for economic growth with a one-year outlook for GDP to grow by 2.7 per cent – down from 3.1 per cent three months earlier – while two-year expectations dropped by 0.2 per cent to 2.5 per cent. Lower-than-expected inflation, despite record migration, has seen governor Graeme Wheeler pause the Reserve Bank’s tightening cycle after hiking interest rates by 100 basis points to 3.5 per cent between March and September. The NZIER says sharp declines in dairy and log prices have cooled expectations for economic growth, while the Auckland housing market may be slowing.