The downbeat business outlook since last year's election won't stall the economy, says the NZ Institute of Economic Research.

The NZ Institute of Economic Research's (NZIER) latest Quarterly Predictions take a more optimistic line than some other recent economic forecasts.

The NZIER still sees annual GDP growth hitting 3.3 per cent this year and averaging three per cent through the next five years - despite a slight slowdown through 2019 and 2020.

The report notes that businesses have remained downbeat since the election despite demand for their own businesses holding up.

Advertisement

The NZIER also takes a quarterly survey of business opinion, which has recorded a drop in confidence across most regions since the election.

The contrast between sentiment and "what was actually going on in the economy" was quite stark, said NZIER principal economist Christina Leung.

"When you look across all the activity indicators, even in the retail sector which is particularly pessimistic, sales are actually holding up," Leung said.

"But it's things like the changes to labour laws and all the uncertainty of what's going to happen to costs that's causing a lot of that pessimism."

There was also pressure on the labour market which was expected to flow through to wage expectations, she said.

One effect of that was that businesses "have shown renewed interest to invest in plant and machinery" possibly as a way to offset labour costs.

The NZIER noted that migration had eased slowly from record levels but that the "lagged effects" of the strong population growth, combined with an improving global picture, continued to underpin the economy.

The effects of the migration slowdown would take some time to flow through, Leung said.

For now migration was maintaining demand in the economy, including in the construction and housing sector.

With the Government's KiwiBuild ramping up there were questions about the industry's capacity to meet the demand, she said. But there was little to suggest that demand itself would soften.

Meanwhile, risks around cattle disease Mycoplasma Bovis aside, the outlook for exports continued to brighten.

Improving demand from China and favourable weather conditions were boosting dairy income, Leung said.

She cited Fonterra's recent upward revision of its milk price payout to $6.75 per kg of milksolids - well above the projected break-even of about $5.05.

Leung acknowledged that the outlook did put the NZIER at the optimistic end of recent economist forecasts.

But she noted that this had been the most accurate end of the spectrum of forecasts.

Despite that, some risks remained, she said.

Rising interest rates were likely "to have a considerable impact on disposable incomes".

Trade tensions between China and the US also remained a concern.