Population growth, construction and tourism offset declines in NZ dairy prices.

Prices for dairy exports may have sunk but a trifecta of strong population growth, construction and tourists is propping up the economy.

Christina Leung, NZIER senior economist, will today present a quarterly outlook in Auckland showing these three factors are offsetting the dairy downturn.

"Strong population growth, construction and tourism will be the key driving forces behind solid growth for the next few years. We expect annual GDP growth to recover to around 3 per cent over 2016, and average 2.5 per cent for the following years," Leung said in a report.

Statistics NZ figures show the tourism industry's growth streak has continued with international visitor arrivals up 10.7 per cent to more than 3.17 million for the year ending January. New Zealand saw a new record net gain in migrants of 65,900 in the year to January, driven by increased arrivals from Asia and Australia.


However, Leung warned about tough international conditions and the potential effects.

"The current volatility in global financial markets is a reminder of how quickly sentiment can change. Financial markets are adjusting to the realisation that the [US] Federal Reserve will gradually normalise interest rates in the world's largest economy. This has raised fears about the durability of the recovery in the global economy," she said.

Inflation is still weak, partly due to falling petrol prices.

"Lower petrol prices have also reduced costs for households and businesses and encouraged spending. The decline in petrol prices from a year ago represents a $200 annual boost to each household's wallets. Although wage growth is subdued, it is still outpacing consumer price inflation, resulting in real wage growth for many households," she said.


Editorial: Welcome rain clouds issues for economy
House prices, dairy slump threat to NZ banks
Record migration boosted by Asian, Australian arrivals

All this has left the Reserve Bank of New Zealand in a difficult position.

"The very low inflation environment contrasts with continued strength in asset prices, particularly in the housing market," Leung said.

"The Reserve Bank is becoming increasingly mindful of the consequences of excessively loose monetary policy on asset prices and financial stability. Its more recent communications indicate it will draw on the flexibility in its Policy Targets Agreement when setting monetary policy."