NZ economy seen growing 3% this year amid global uncertainty: forecast

Wellington

THE New Zealand economy will grow by about 3 per cent this year, in spite of slowing demand from its main export markets of China and Australia, an independent economic think-tank forecast on Tuesday.

The economy was in relative calm, against a backdrop of increasing global uncertainty, according to a quarterly forecast from the New Zealand Institute of Economic Research (NZIER).

Domestic demand would be strong, but slowing growth in China and Australia would drag on exports, while dry conditions would dent production in the pillar agriculture sector, which has already been suffering lower dairy prices, NZIER principal economist Shamubeel Eaqub said in a statement on the forecast.

The global economy was bracing for very weak inflation, or even deflation in some parts, and New Zealand would import low prices, he said.

Domestically-generated consumer price inflation would remain soft.

That meant the Reserve Bank of New Zealand (RBNZ) would face almost no inflation, except in the soaring housing market in the biggest city of Auckland, home to almost a third of the population.

"The RBNZ is in a difficult policy position. Moderate growth, subdued inflation and global risks suggest monetary policy should be supporting growth. But Auckland house prices, which rose nearly 16 per cent over the past year, suggest the RBNZ should tighten," said Mr Eaqub.

On balance, the RBNZ could not justify any changes to the official cash rate, sitting on 3.5 per cent this year, "but they should and will unleash macro-prudential tools to dampen a superheated Auckland housing market", he said.

The RBNZ tightened mortgage lending controls in October 2013, saying the runaway Auckland housing market was a threat to the country's financial stability, but price rises have failed to slow significantly.

Critics say immigration and lightly regulated overseas property purchases are fuelling prices.

A separate report published on Tuesday showed New Zealand's near-term inflation expectations eased in the first quarter, retreating further from the midpoint of the central bank's target band, backing expectations that interest rates will be on hold well into next year.

The quarterly survey of expectations done on behalf of the Reserve Bank of New Zealand (RBNZ) showed that business managers forecast annual inflation to average 1.11 per cent over the coming year, from 1.59 per cent in the previous survey in November.

Two-year inflation expectations - seen as the time frame when RBNZ policy action will filter through to prices - were 1.80 per cent from 2.06 per cent.

The central bank has halted its policy tightening because of receding inflation pressures, falling commodity prices, and global uncertainty, and is not expected to resume rate rises until the first half of next year.

The survey also showed that monetary policy was seen as easy and expected to stay so through the year, while growth expectations were steady, while unemployment is expected to fall further. XINHUA, REUTERS