Jobs, better wages tipped by NZIER

Canterbury rebuild hitting high gear will help economy grow 3% this year, says NZIER.

The New Zealand Institute of Economic Research expects the economy to grow 3 per cent this year - a third of it as a result of the Canterbury rebuild hitting high gear and the rest a return to unspectacular normality in the rest of the country.

"There will be more jobs and wages will start to grow at a decent pace," said NZIER principal economist Shamubeel Eaqub.

"But rising mortgage rates will take a bite out of those rising incomes. Mortgage rates have already risen by about 0.5 per cent in anticipation of official cash rate increases by the Reserve Bank. We reckon there will be another 1.5 per cent of mortgage rate increases by early 2015."

But the bank will raise rates gingerly, Eaqub believes.

"Because the economy is still in an early recovery phase and momentum is still modest outside of the Canterbury rebuild, interest rate increases have the potential to slow the economy sharply."

Households are highly indebted relative to their incomes, and most of the debt is either at floating rates or fixed for very short terms.

However, Eaqub points to a couple of factors which could moderate the impact of rising interest rates.

Many businesses have sufficient reserves to invest without borrowing so the impact on investment might be shallower than in previous cycles.

For households which are highly leveraged borrowers, an increase of 2 percentage points in mortgage rates equates to a 10 per cent reduction in the income available to spend on other things.

But many can switch to fixed-rate mortgages to delay and spread the impact of OCR hikes.

"If borrowers fix, as they did in the last Reserve Bank hiking cycle, then the impact of interest rates on existing borrowers will be slow."

The bank is increasing interest rates now to dampen the Auckland housing market in hopes of avoiding a bigger bust later, according to Eaqub.

"The Auckland housing market has run away from fundamentals. Average prices are 10 times incomes, making it one of the most overvalued cities in the world."

But fears of generalised inflation are overdone, in his view, with little upward pressure from wage costs or global inflation.

Employment growth is broadening beyond the reconstruction work in Canterbury, he says, but while job losses during the recession were widespread, the subsequent recovery in jobs has been narrowly focused in a few industries and regions.

"Much of the growth has been from resource booms, like dairy and oil, or in city-based service jobs."

The regional differences are mainly due to deep-seated and long-term forces of globalisation, urbanisation and population ageing, Eaqub argues.

"The current economic recovery will be concentrated in service sector jobs in large urban centres."