KEY POINTS:
Recent indicators suggest the New Zealand economy may be picking up speed but any new acceleration will be short lived, the ANZ bank says in its latest quarterly economic focus report.
Among factors curtailing the reflation theme would be an interest rate rise expected from the Reserve Bank
next month.
Other factors were imbalances and capacity constraints curtailing the economy's supply-side capacity, and recent tightening of currency and financial conditions, notably with the NZ dollar pushing above US70c.
Some high commodity prices were masking differing fortunes within the rural sector, and while dairy prices were up sharply, lamb prices were down considerably, ANZ said.
Rising costs were eroding rural profitability further, and rural land prices had peaked, with a record number of properties on the market.
The business sector was similarly feeling the pinch, with ANZ estimating that business profits were down more than 10 per cent on a year ago.
The resurgence of the NZ dollar during the second half of last year and early this year would hit exporters particularly hard, given that most of their hedging would have run out, ANZ said.
At the same time, the household sector had been insulated, with labour hoarding by firms meaning households continued to enjoy the best job market in a generation, helping keep consumer spending and the housing market buoyant.
The Government's coffers were also awash with cash, resulting in a record operating balance of 7.3 per cent of GDP for the 2006 fiscal year.
ANZ expected house prices to ease in 2007 as demand for labour was reduced and the unemployment rate rose during the next two years, although remaining low by historical standards.
Modest growth in 2007 would represent the third year of soft performance, but the economy had achieved the "fabled" soft landing.
Provided the soft performance this year dampened inflation pressure, an upswing would be at hand, but not until late 2008, ANZ said.
It expected factors influencing the economy in 2008 to include fiscal loosening as the Government unleashed the war chest it was hoarding to ensure a fourth term in power.
Concern about a stimulatory fiscal policy in the Government's 2008 budget would limit the Reserve Bank's scope to move interest rates back to a neutral setting.
But ANZ did predict the expected March rate rise -- and any other hike soon after -- to be withdrawn in late 2007 or early 2008.
It also predicted an aggressive easing during 2009, taking the Official Cash Rate to 5.5 per cent, from its present 7.25 per cent, by September 2009.
As for the NZ dollar, the bank expects the currency to be well supported in the early part of this year, but to move down in the middle of the year.
- NZPA