ASB Institutional - Quarterly Economic Forecasts: Building Momentum

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2013 economic outlook to be shaped by the Canterbury rebuild with a global backdrop of modest growth. NZD likely to remain stubbornly elevated, although the impact of this is felt unevenly across the economy.

There is a growing possibility that the RBNZ will reach for its macro-prudential toolkit to cool the housing market and credit growth.

2012 was a year of modest growth for NZ and encouraging signs that Canterbury’s rebuild is getting underway, but a year also interrupted by further Eurozone crisis flare-ups and US fiscal deadlock. These themes are likely to repeat in 2013, but by the end of the year we expect a better local economic performance and a bit more progress in getting on top of the developed world’s various debt woes.

Global growth should be similar to last year at upwards of 3.3% – overall near the long-term average but with risks continuing to hover in the background. Again, developing economies will be providing the momentum as developed economies continue working through the aftermath of high debt levels, with US fiscal wranglings taking centre stage in the first half of the year. The Eurozone debt crisis is now less severe with the risk of a disorderly default or euro exit reduced. But occasional set-backs will continue, and the Eurozone economy will be stagnant over 2013. China’s economy has achieved a soft landing, though acceleration over 2013 is likely to more modest than in the past. That means Australia will need to engineer a lift in the non-mining part of its economy as investment in mining-related infrastructure peaks earlier than previously expected.
NZ’s recovery was patchy over 2012, but we expect momentum to pick up over 2013. Earthquake rebuilding is gearing up in Canterbury, along with other signs that the region’s economy is starting to rebound. To readily highlight the progress of the rebuild, we recently developed a new monthly indicator, the Cantometer. Rebuilding activity will be a key driver of higher overall NZ growth. The broader housing market is likely to continue strengthening, particularly in Auckland, further boosting house-building to meet demand. Greater building activity will filter through to the wider economy.

The NZ dollar is likely to remain stubbornly high for much of 2013, the legacy of NZ’s better relative economic health. The impact of the high NZD is, however, spread unevenly across the trade-exposed sectors of the economy. In this Quarterly we summarise some recent work we have been doing on the exchange rate. We created manufacturing-focussed alternatives to the RBNZ’s Trade Weighted Index (TWI) exchange rate for manufactured exports and manufactured imports. These export and import exchange rate indices suggest import-competing manufacturers have had the heavier going relative to the manufacturing export base.

The RBNZ faces a difficult dilemma this year. Inflation pressures will increasingly be generated by the rebuild of Canterbury. Moreover, the heat of the housing market shows no sign of letting up, particularly in Auckland. Credit growth is also starting to pick up across the board, a clear indication that households and businesses are responding to low interest rates. But on the other side of the equation is the muted economic recovery in 2012, low inflation pressures at present, and the still-high exchange rate – all of which suggest little urgency for the RBNZ to lift the OCR. We think it is likely the OCR will not increase until the first quarter of 2014. But there is a growing possibility that the RBNZ will reach for its macro-prudential toolkit to cool the housing market and credit growth.

Download the full report. For more information about Corporate Banking visit ASB Institutional.

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ASB Quarterly Economic Forecasts February 2013