Westpac: New Zealand economy is 'ultimate Houdini'

THE New Zealand economy has managed the ultimate "Houdini" act by avoiding the inflationary pressures that usually go along with strong growth, Westpac said.

The bank, in an economic overview, said lower commodities prices were going to make life difficult for some regions but that it expected domestic demand to remain robust.

Latest data from Statistics New Zealand showed the consumers price index increased by a lower-than-expected 1.0 per cent in the year to the September 2014 quarter.

According to SNZ's gross domestic product data, the economy grew by a healthy 3.5 per cent in the year to June.

"Like some kind of Houdini, New Zealand appears to have escaped from the traditional economic bind," Westpac chief economist Dominick Stephens said.

Rapid economic growth often leads to inflation or higher interest rates, either of which can put the brakes on growth.

"But New Zealand's current bout of rapid growth has surprised us by producing no inflation to speak of.

"New Zealand's "speed limit" - the rate at which the economy can grow without generating inflationary pressures - appears higher than we gave it credit for.

"That means the economy has more freedom to grow without the Reserve Bank hiking interest rates so vigorously," he said.

Stephens said it now looked as though the official cash rate hiking cycle would peak at the "stunted" level of just 4.75 per cent, from the current level of 3.5 per cent.

"And the outlook is indeed for another year of solid economic growth," he said.

Sharply lower dairy and forestry prices were going to make life difficult for some regions and some sectors.

But Westpac economists expected broader domestic demand to remain robust, fuelled by the Canterbury rebuild, burgeoning construction activity elsewhere, and booming net immigration.

"That said, we remain concerned that New Zealand will experience a significant economic downturn later in the decade, when the Canterbury rebuild has passed its peak, population growth has dropped, and the housing market has finally cracked under the pressure of higher mortgage rates," the bank said.

See a Statistics NZ chart showing NZ inflation rates over the past decade:

 



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