Slowing global growth and the overvalued Auckland housing market are key risks to New Zealand's economy, which is slowing to a more sustainable pace, says Shamubeel Eaqub, chief economist at the New Zealand Institute of Economic Research.
Annual economic growth will average 2.5 percent over the next five years, according to the institute's quarterly economic predictions. With little inflation both domestically and globally the institute sees no reason for the Reserve Bank to raise the official cash rate until 2016.
"The economy is growing, but the pace is moderating," said Eaqub. "One-off boosts are fading, but there is a durable underlying recovery taking place that is not built on fickle borrowing."
The institute expects a one-off boost from the Christchurch rebuild to peak in early 2015, while the rural rebound after last summer's drought, which stimulated growth at the start of the year, is largely finished. In their place, more moderate and sustainable activity underpins economic growth, generating jobs and income growth, Eaqub said.
The institute's predictions come after the central bank's survey of expectations found New Zealand businesses had trimmed their expectations for inflation over the next two years as economic growth moderates. Firms cut their expectations for economic growth, with a one-year outlook for gross domestic product to grow 2.7 percent, down from 3.1 percent three months earlier, while two-year expectations slipped to 2.5 percent from 2.7 percent.
Lower-than-expected inflation, despite record migration, has seen Reserve Bank governor Graeme Wheeler pause his tightening cycle, after hiking interest rates by 100 basis points to 3.5 percent between March in September. Sharp declines in dairy and log prices, New Zealand largest- and third-largest exports, have cooled expectations for economic growth, while the steam may be coming out of the Auckland housing market.
The risk of weaker global growth, which would weigh on commodity prices and the regional economy, is one of the key risks to economic growth, Eaqub said. "Any bursting of the Auckland housing bubble will dent consumer confidence and banks' willingness to lend."
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