Economy still humming 'rock star' song

Paul Bloxham says growth is strong.

HSBC chief economist Paul Bloxham, who first coined the phrase "rock star" in January last year to describe New Zealand's economic growth, says the economy is still a rock star despite lower dairy prices and slower growth in major trading partners.

In an Asian economic quarterly report out yesterday, Bloxham said a range of indicators showed the New Zealand economy continued to be supported by a construction boom, with 15 out of 16 sectors that contribute to GDP growth showing expansion over 2014. Overall GDP growth was also running well above trend at 3.5 per cent year on year.

Other economists have moved on from the term rock star to "Goldilocks" economy, forecasting steady growth for New Zealand.

The New Zealand dollar has reached near parity with the Australian dollar for the first time in 42 years and there are some early signals that domestic price pressures are picking up. Bloxham said that indicated the Reserve Bank was unlikely to cut rates this year, in contrast with current market pricing and despite New Zealand's interest rates being much higher than the rest of the world's.

"In contrast to current market pricing, which suggests the Reserve Bank is likely to cut rates by Q3 this year, we still think they are more likely to remain on hold," he said.

Domestic factors are largely driving the economy with the post-earthquake Canterbury rebuild still ramping up and strong population growth supporting an upswing in Auckland residential construction.

The building boom is creating jobs with employment up 3.5 per cent year on year, boosting incomes and confidence and supporting increased spending, according to Bloxham.

Concern by policymakers about the high Kiwi dollar and its impact on exporters was surprising, he said.

"Much of that data does not support these concerns. Growth is strong and broad-based. The exchange rate-sensitive exports, such as manufactured goods and tourism services, are performing well despite the high currency."

Bloxham admitted the strong currency was a key factor in low inflation below the bottom of the Reserve Bank's 1 to 3 per cent target band.

Inflation was expected to fall from the current 0.8 per cent for the December quarter towards zero for the year's first quarter thanks to low oil prices - good, not bad disinflation, he said. "With GDP and employment growth above trend, low inflation is a bonus, as it also helps improve living standards."

Bloxham forecasts domestic inflation will rise soon as the economy is growing strongly, and the petrol price impact will be out of the picture by early next year.