Budget 2013: Chch rebuild 'key driver' of growth

Liquefaction and earthquake damaged houses in Burwood, Christchurch. An $18b rebuild will be the key driver behind NZ's 2.5pc expected annual growth rate over the next four years. Photo / NZ Herald

Some $18 billion of new residential housing in Canterbury, accounting for almost half the region's rebuild, will be the key driver behind New Zealand's 2.5 per cent annual rate of growth over the next four years.

The Treasury sees gross domestic product growth of 2.5 per cent in the year ended March 31, slipping to 2.4 per cent in 2014 before rising to 3 per cent and 2.6 per cent the following two years, according to its Budget forecast. That will taper off in 2017 to an annual pace of 2.2 per cent.

The average forecast is slightly above the annual 2.4 per cent rate flagged in the Treasury's half-year economic and fiscal update in December, with a bigger cost for the Canterbury rebuild replaces the 0.7 per cent reduction from the recent drought. Residential investment is expected to peak at 29 per cent growth in the 2014 March year.

"Residential investment remains a key driver of demand growth in these forecasts," the Treasury said. "A significant proportion of the growth in residential investment across the forecast period is driven by earthquake-related investment associated with the Canterbury rebuild."

That investment in housing is expected to spill over into other consumption, though the Treasury doubts rising house prices will have as great an effect on household demand as in the past and expects household saving rates to stay largely flat at around zero.

The Treasury overhauled its forecast on house price inflation over the next five years, with annual inflation of 7.1 per cent in the 2013 and 2014 years, slowing to an annual pace of 2.6 per cent the following year, then 2.4 per cent and 2.1 per cent by 2017.

It had previously seen housing inflation peak this year at 6.5 per cent, before slowing to between negative 1.3 per cent and plus 1.6 per cent over the following four years.

It also has a more aggressive forecast on increases to the 90-day bank bill, often seen as a proxy for the official cash rate, than the Reserve Bank as the Canterbury rebuild chews up spare capacity and imposes inflationary pressures on the economy.

The Treasury sees the bank bill rate at 2.7 per cent until 2014, rising to 3.6 per cent in 2015 and 4.3 per cent the following year, half a percentage point higher than the central bank's 2016 and 2017 forecasts.

New Zealand's bubbling property market is seen as a threat to the country's financial stability, with the International Monetary Fund yesterday saying local housing is about 25 per cent over-valued and the Reserve Bank last week threatening to introduce restrictions on low equity loans if they pose a "significant risk" to the system.

Rising house prices are seen as an upside risk to the Treasury's economic forecast if it leads to an associated increase in consumer spending and tighter monetary policy sooner than expected. That would drive up nominal GDP by $19 billion over the forecast period and trim 0.2 percentage points from the jobless rate, leading to higher tax revenue for the government.

The Canterbury rebuild is also expected to underpin a recovery in the labour market, with unemployment currently at 6.2 per cent in the March 2013 quarter, falling to 5.2 per cent by 2017. Labour market data has been seen as unreliable in recent quarters, with the benchmark household labour force survey showing persistently high unemployment at odds with other measures.

New Zealand's current account deficit is forecast to keep widening to 6.5 per cent to GDP by 2017 as trade surplus from exported goods falls in the wake of the drought and the deficit from imported services remains elevated.

The Treasury sees the currency, which has been holding back export receipts, as falling to 69.2 on a trade-weighted basis by 2017 from as high as 77 in 2014. The country's net international investment liability is forecast to grow to 80.9 per cent of GDP from 71.9 per cent estimated in 2013.