Economy tipped to keep on growing

Infometrics is forecasting the economy will expand at more than 3 per cent annually over the next five years and dismisses suggestions of impending recession.

The independent forecaster's prediction yesterday is in line with an OECD report released this week which was criticised in some political quarters as overly optimistic.

They contradict Westpac Bank economists who said only lingering strength in the housing market was keeping a recession at bay.

"We are certainly not headed for recession," Infometrics managing director Andrew Gawith said.

The forecaster believes the trough in the current cycle would be a reasonable 2.5 per cent growth rate.

Higher productivity was the key to sustained economic growth.

Investment in plant and equipment had climbed 36 per cent in the last two years, indicating firms were looking for ways to increase capacity other than simply hiring more staff, Gawith said.

"The 10 per cent rise in New Zealand's terms of trade since 2003 hints at smarter production decisions behind the scenes," he said.

"Farmers have been changing how they use their land and their expertise to produce higher-value products.

"These changes, plus high world prices for many products, have helped keep primary producers profitable despite the surging currency."

Gawith said higher quality government spending was potentially an important source of increased productivity.

"Given the Government's interest in lifting productivity, and Opposition parties' concerns about sloppy spending and their keenness to cut taxes, there is a good chance of realising some of the potential productivity gains from the government sector."

Gawith said a concern over the next couple of years was a possible slump in house prices that would dent household confidence and spending.

"But the rapid decline in new house building will limit the extent to which the market becomes oversupplied, and therefore house prices in most areas are likely to stagnate, rather than fall.

"Households, in other words, will get to keep most of the wealth gains they've accumulated since 2001/02."

Gawith said average growth rates of 3 per cent plus would be better than the OECD average and put New Zealand on track to returning to the top half of the club of rich nations.

He noted population growth had slowed, so while national aggregate growth (GDP) would slow, per capita growth would not ease as much.

Gawith said there had been a favourable medium-term shift in New Zealand's terms of trade.

Almost all the productivity growth had come in the primary sector. Farmers had pushed into higher value products to achieve improved returns.

"It means New Zealanders on average have more spending power."

- NZPA