HSBC has been optimistic about New Zealand’s economy for a long time, and remains so.
Australia, New Zealand and Global Commodities chief economist Paul Bloxham christened the economy a "rock star" in 2014, a phrase that stuck.
In his latest review of the economy, Mr Bloxham said growing ties to Asia, underlying flexibility and a positive reform agenda had all worked in New Zealand’s favour.
Growth had been driven by record rates of inward migration, rising construction activity and a booming tourism industry.
Weighing on the positive story for the past couple of years had been weak conditions in the dairy sector. However, milk prices improved recently and the dairy sector was now recovering.
"New Zealand’s economy is, once again, firing on all cylinders."
Following GDP growth of 3.2% in 2016, HSBC expected continued above-trend growth of 3% this year, he said.
At a deeper level, growth had been underpinned by reforms put in place in 2009 and an improving fiscal position. The latest Budget estimates showed a second year of fiscal surplus in 2015-16 and that surpluses were set to continue. That was in stark contrast to Australia’s more challenging Budget situation.
Nonetheless, policy makers had faced challenges, Mr Bloxham said.
For the Reserve Bank, consumer price index inflation (CPI) had been too low — having been below the bank’s "near 2%" target for five years, prompting the central bank to cut the cash rate to a record low level of 1.75%. That had, in turn, motivated a significant rise in house prices and household debt, particularly in Auckland, which presented risks to financial stability and had reduced housing affordability, he said.
"Thankfully, the low inflation challenge may be almost oer. We expect the combination of continued strong local growth and higher commodity prices to push CPI inflation up again in 2017."
The Reserve Bank’s next interest rate move was likely to be up, although the central business case did not have hikes until 2018. Having had CPI inflation below target for five years, the central bank might be cautious about lifting rates, Mr Bloxham said.
Adding to the policy uncertainty, housing affordability was exp-ected to be in focus at this year’s election. Reserve Bank governor Graeme Wheeler’s term was due to end on September 25.
The strongest part of the economy was construction, he said. Construction contributed more to GDP growth than any other sector.
The rebuild of the Canterbury region, following the major 2010 and 2011 earthquakes, was a key driver of construction activity in recent years.
At a total estimated cost of $40billion, the rebuild was a significant project likely to span a decade or longer. The residential part of the rebuild drove much growth from 2012 to 2014 but that activity had reached a peak and residential consents had started to level out.
The commercial and public aspects of the rebuild, which took longer to get going, were still increasing but were also likely to peak soon, Mr Bloxham said.
"From 2017 onwards, the Canterbury rebuild is likely to become a small drag on growth as we are now past the peak of its impact on the economy."
As the rebuilding activity started to wane in Canterbury, building work was expected to continue to grow quickly in other parts of the country. Residential construction was "ramping up" quickly in many regions in response to the strong rate of population growth — centred on Auckland where about half of new migrants settled, he said.
The strong increase in housing approvals outside of Auckland and Canterbury was partly driven by reduced housing affordability in Auckland which was encouraging new migrants to settle in other regions.
