Faster economy tipped

The kiwi dollar has climbed to levels that don't match the underlying economic conditions, says the Reserve Bank. Photo / NZPA

Risks remain, the NZIER says, including the chance of another property bubble.

The economy will grow faster this year and next year than we have seen since the recession but the recovery remains brittle, the Institute of Economic Research says.

Its latest quarterly forecasts have annual growth rates averaging 2.5 per cent over the next three years, as a prolonged period of monetary and fiscal stimulus finally begins to flow through.

That would be an improvement from less than 2 per cent over the past three years, though still slow compared to past recoveries.

But risks remain, the institute says, including the risk of resurgent credit growth leading to another property market bubble.

House prices did not fall much during the recession, nor did household debt.

Were a property bubble to inflate and then burst, a sharp fall in house prices could lead to a painful recession, widespread wealth destruction and job losses, such as followed a 30 per cent drop in real house prices in the United States.

House prices are beginning to rise rapidly in Auckland and Christchurch. If the spike proves short-lived and remains localised in those cities, as an appropriate market signal to build more homes in areas of a supply shortage, the Reserve Bank would not need to act, the institute says.

But the case for higher interest rates is building and it expects the bank to start raising interest rates early next year.

The global backdrop it sees as one of patchy and fragile recovery.

"There is encouraging improvement in the US and China, but Europe and Japan are mired in recession," it says.

"Australia is slowing, but is receiving large doses of monetary stimulus. Fiscal imbalances in the US and Europe remain unresolved and are the key risks to the global economic outlook."

New Zealand exports have been resilient in recent years, the institute says.

Though the kiwi dollar has appreciated nearly 40 per cent from its recessionary low in 2009, exports as a share of the economy have risen from 31 to 34 per cent.

But they have become more concentrated, with more dairy products and less of many other manufactured products. And there is an increasing risk of drought.

It expects the dollar to remain high for the foreseeable future as major trading partners pursue loose monetary policy.