Recovery patchy, says economist

The Canterbury rebuild will add to growth, but take longer than the consensus view, says institute. Photo / Greg Bowker

Subdued inflation will keep the Reserve Bank's official cash rate on hold until at least 2014, the Institute of Economic Research predicts.

Its latest quarterly forecasts describe the recovery under way as "slow and patchy", "dreary", "plodding" and the "slowest in 80 years".

It expects growth over calendar 2012 to come in at 1.8 per cent and pick up only modestly to 2.1 per cent next year.

That is weaker than the consensus among economic forecasters for 2.4 and 2.6 per cent respectively.

"The Canterbury rebuild will add to economic growth, but we believe it will take longer than the consensus view," NZIER principal economist Shamubeel Eaqub said.

"We also believe New Zealand exports are more vulnerable to an Australian slowdown than the consensus."

The mining investment boom across the Tasman was fading, while the non-mining states were slowing and the housing market falling, he said.

"The Reserve Bank of Australia is cutting interest rates but the economy may take time to respond as Aussie households become more careful with debt," he said.

Kiwi households are also cautious.

"They are borrowing more but still in a prudent way with relatively large deposits," Eaqub said.

While the recession did not see as many jobs lost as previous recessions had, the recovery in hiring had been decidedly weak. He expects employment growth only to keep pace with population growth for the next couple of years, which in turn will keep wages growth subdued.

"Unavoidable living costs are rising, which is squeezing out spending on discretionary things, prices of which are generally falling. Household spending will continue to grow gradually," he said.

"There are pockets of inflation but they are acting as a tax, reducing spending and prices of other goods and services. Firms have little pricing power amid anaemic demand."

In this environment Eaqub expects business investment to remain subdued.

"New investments in plant machinery and equipment, new office space or business processes may give a competitive advantage and market share gains, but with a slow economy, it may take many years to recoup the cost of investment."

Pent-up demand for housing in Auckland and the recovery from the earthquakes in Canterbury will drive a residential construction recovery, but other regions will be slower to recover.

With mortgage rates low, banks willing to lend and the cost of a new home comparing favourably to the price of an existing home, the conditions for residential construction recovery were in place, Eaqub said.

But it would be gradual compared with history, because households remained cautious about borrowing.

Even though recent data suggested economic growth had slowed compared with the first half of the year and the global growth outlook was fragile, interest rate cuts were unlikely in the near term because of the housing market, he said.

"House prices are rising again which drove much of the imbalances in the lead-up to the recession here and abroad."

NZIER expects the exchange rate to remain high.

"Our economic performance, while anaemic, is better than most of our trading partners," Eaqub said.