The New Zealand economy is set to move into high gear in 2017, according to ASB Bank.

The bank said this year was shaping up to be "full of promise" after a slow start in 2016.

Much to the Reserve Bank's frustration, CPI inflation remained very weak - rising by just 0.4 per cent in the September year.

The central bank cut its official cash rate three times last year to its current level of 1.75 per cent.


"But now the groundwork has been laid for the New Zealand economy to shift back into high gear," said ASB senior economist Jane Turner.

Strong population growth and low interest rates have fuelled construction demand and a tourism boom has the retail sector humming, she said in a commentary. The labour market has tightened and households now feel more confident.

Dairy prices have turned around after a two year slump, and analysts are already picking that Fonterra will lift its $6 per kg of milksolids farmgate milk price for this season.

Turner said much would depend on the international outlook, especially after the surprise election of Donald Trump as the next President of the United States.

"The key risk is if Trump's administration follows through with anti-trade rhetoric from Trump's election campaign and imposes stifling import tariffs on China," Turner said.

While New Zealand's third quarter growth rate of 1.1 per cent proved stronger than expected, this surprise was diminished by the fact growth over the first half of last year was revised lower to be less impressive than previously thought.

"While cumulative growth over the previous 12 months may not have been quite as spectacular as hoped, it was solid nonetheless," Turner said.

"And more importantly, we expect growth to remain above 3 per cent - and above trend - over 2017," she said


"With New Zealand growth revving up, we expect inflation trends to also improve."
This means the Reserve Bank is most likely done with cutting the OCR - assuming no big global disruption hits in 2017.

Combined with a sharp shift in the US growth/inflation outlook, New Zealand and international interest rates have lifted quite sharply in a short space of time.

Nonetheless, New Zealand interest rates do remain relatively low for the time being, but borrowers must brace for higher interest rates in coming years, she said. Meanwhile, savers can finally breathe a sigh of relief, as nominal yields continue to improve over the coming year, Turner said.

"All going well, 2017 should be a prosperous year for New Zealand. But, as always, being a small open economy which is subjected to the whim of global sentiment, we need to also prepare for the unexpected," she said.

Consumer confidence has steadily improved over 2016.

"As we start a new year, household confidence is now well above average levels and points to stronger consumer spending growth."

Turner said there were signs of healthy consumer confidence - from the busy mall car parks ahead of Christmas to the heavy holiday traffic.

Confident households were more likely to indulge at Christmas time and head away on holiday, rather than enjoy a "staycation".

The tightening labour market had been a factor in contributing to a more confident consumer outlook.

"Furthermore, the recent recovery in dairy prices will deliver a wave of relief in dairy-intensive regions, meaning 2017 consumer spending growth should be fairly broad based across the country," Turner said.

"Stronger domestic consumer spending should see NZ economic growth become relatively self-sustaining, and hopefully reasonably resilient to any global shock that could come our way."