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, ANZ said.
Some high commodity prices were masking differing fortunes within the rural sector and although dairy prices were up sharply, lamb prices were down considerably.
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 dollar's resurgence 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 to 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 this year as demand for labour fell and the unemployment rate rose during the next two years, although staying 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 next year, ANZ said.
It expected factors influencing the economy next year to include fiscal loosening as the Government unleashed the war chest it was hoarding to ensure a fourth term in power.
But it predicted imminent rises in Reserve Bank interest rates to be withdrawn late this year or early next year.
And the bank expects the dollar to be well supported in the early part of this year but to move down in the middle of the year.
- NZPA