Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Rebuild vital catalyst for growth

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Despite grim unemployment data, economists believe factors, such as housing, will lead to a pick-up in 2013.

Quake reconstruction in Canterbury, expected to cost $30 billion, should be a key driver of growth. Photo / APN
Quake reconstruction in Canterbury, expected to cost $30 billion, should be a key driver of growth. Photo / APN

Economists expect the pace of economic growth to pick up this year, propelled by reconstruction in Canterbury and the housing market.

It needs to.

The last word from the statisticians just before Christmas was that the September quarter had been much weaker than forecasters had expected, recording gross domestic product growth of just 0.2 per cent. They also revised down growth in the first half of the year.

That means the economy starts the new year with less momentum than previously expected.

It came on top of grim data from the labour market - a jump in the unemployment rate to 7.3 per cent, the highest it has been since 1999.

Other, more timely, indicators are more positive, however. Consumer confidence, as measured by the Westpac McDermott Miller survey, ended 2012 at its highest level for more than a year.

The combination of low interest rates and a warming housing market may have been a factor, Westpac economist Felix Delbruck said.

"There was a particularly big improvement in households' reported financial situation among those of middle age and middle income, who tend to dominate the mortgage belt, and in Auckland, where house prices have risen most."

House prices have been rising for the past two years. The Real Estate Institute's stratified house price index in November was up 7.3 per cent on a year earlier, the fastest annual growth since late 2007.

Business confidence is also relatively high.

For those who prefer more tangible indicators than sentiment, ANZ's Truckometer, which tracks vehicle movements on a subset of roads historically well correlated with economic activity, has rebounded from the weak levels of the September quarter, suggesting it was a pothole and not a ditch, ANZ economist Sharon Zollner said.

A key driver of growth will be the rebuilding of Canterbury, which the Treasury estimates will cost around $30 billion.

It expects spending to rise from around 0.6 per cent of GDP in the current March year to 1.2 per cent in the year to March 2014 and around 1.5 per cent a year for the three years after that.

On top of that is pent-up demand in the rest of the country, notably Auckland, following a dearth of building since the global financial crisis, and an ongoing need to repair leaky homes. This will spill over from construction to other sectors, in particular manufacturing and transport.

On the outlook for the market in existing homes, however, economists differ. ANZ chief economist Cameron Bagrie expects the dynamics behind a drop in mortgage rates last year - falling funding costs and aggressive competition among banks in the context of weak credit growth - to fade.

With the labour market showing further signs of cooling, further strengthening in the Auckland residential property market does not pass the smell test, he said, given the lack of an income-based driver.

"And to top it off, the Reserve Bank is warning that if necessary they will delve into their prudential policy toolkit to slow the market before things get too ugly."

But the Bank of New Zealand's chief economist, Tony Alexander, is sceptical of a slowdown in the pace of house price rises in Auckland.

This year he sees the pace of economic growth lifting, jobs growth appearing and the unemployment rate falling, net migration flows turning positive, more buyers coming out of the rising Asian middle class, rising construction costs and more investors entering the market.

"It is quite conceivable - though hardy desirable from a social stability point of view - that in a year's time the pace of increase in average New Zealand will be above 7.3 per cent."

That would come as a surprise to the Reserve Bank. Its December monetary policy statement took a sanguine view of the outlook for house price inflation nationwide, forecasting it to peak at around 5.5 per cent later this year before falling back to 2.5 per cent by early 2015.

It is one of the key assumptions underpinning the bank's expectation that it will not have to raise the official cash rate from its all-time low of 2.5 per cent this year.

That guidance could end up in the "that was then, this is now" pile, should house price inflation and credit growth prove significantly stronger than it expects.

"However, the Reserve Bank's conundrum is the weakness that remains in the economy, outside of housing construction, the stubbornly high New Zealand dollar and the subdued inflation; pressures at present," ASB economist Jane Turner said. "The bank will be reluctant to increase the official cash rate until it has seen signs of sustained momentum in the economy."

So ASB economists think the central bank may give consideration this year to using macro-prudential tools - which in effect raise the cost to the banks of mortgage lending - to cool the housing market, allowing it to leave the OCR on hold.

An economic headwind this year will be the Government's fiscal policy, which will be subtracting demand from the economy.

The Treasury estimates the fiscal impulse will be contractionary to the tune of 1.1 per cent of GDP in the year to March 2014, and 1.4 per cent the year after.

For exporters and firms competing with imports, economists hold out little prospect of relief from the high dollar. The consensus forecast for the average value of the New Zealand dollar on a trade-weighted basis over the year to March 2014 is just 1 per cent lower than its average in the December 2012 quarter.

Underpinning that are forecasts of economic growth which compare favourably with most developed countries.

The consensus among 10 private and public sector forecasting operations surveyed by the New Zealand Institute of Economic Research just before Christmas is for annual average growth to pick up from 2.3 per cent in the year to March 2013 to 2.8 per cent in the March 2014 year.

Employment growth in the year ahead is forecast to be 1.8 per cent, enough to bring the unemployment rate down to 6.3 per cent by March next year.

But the current account deficit is forecast to widen to $13 billion by then from $10 billion now.

As ever, the forecasts are vulnerable to shocks from the other 99.8 per cent of the world economy.

The United States managed to avoid jumping off the fiscal cliff but faces a Grand Canyon-sized chasm of partisan disagreement about how to put its public finances on a sustainable footing. Several months of wrangling and brinkmanship on that score still lie ahead.

Europe's debt issues could go from chronic to acute at any point, and the Middle East remains a powder keg.

- NZ Herald

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