Good news about economic growth prospects keeps rolling in, but this increases the upside risk to interest rates and the exchange rate, while the diverse factors at work mean there will be some major differences in regional economic growth. There is plenty to celebrate: surging net migration has doubled population growth to close to 1.5% per annum; despite the bank lending restrictions having a reasonably negative impact on the housing market, consumer confidence has improved; employment growth is strong; Canterbury rebuilding continues to pick up; especially dairy farm incomes are booming and this will fuel off-farm spending; and global growth prospects have improved.
Aided by the post-drought rebound in agricultural production, economic growth could hit 4.5% by mid-year. The stronger economic growth will further reduce the fiscal deficit and put the government in a better position to justify some handouts in the 15 May Budget.
The economic forecasters are paying little attention to the government housing initiatives that have the potential to significantly boost residential building over the next several years in the nine areas of the country earmarked for housing accords by the Minister of Finance.
Unfortunately, just when prospects for the majority of firms are looking really good, the threat of interest rate increases arrives.
The Reserve Bank’s focus has been on cooling house price inflation. But with leading indicators of employment growth surging (see the chart) and little spare capacity in the labour market, labour cost inflation threats aren’t far away and will become a focus for the RB.
The RB incorrectly predicted upside in interest rates over the last several years but may finally be on the money in predicting around 2% upside in the cheapest available mortgage interest rates over the next two years.
For the parts of the country that won’t benefit from housing accords boosting residential building, the threat of significant upside in interest rates is particularly concerning.
The prospects of robust economic growth and interest rate increases generally results in upside in the exchange rate, so for exporters and firms competing against imports international competitiveness could become more of a challenge.
The chart shows the ANZ survey of employment intentions that is measured as a net percentage positive or negative reading.
Rodney Dickens
SRA
www.sra.co.nz