There has been talk in the media recently about New Zealand having a ‘Rock Star’ economy over the coming year, but what does this mean, and how certain is it?
The comment came from an economist at HSBC who was looking at projections the NZ economy might grow at 3.4% in 2014, and is expected to have grown 3% in 2013. This is well above other developed nations – Australia’s economy is expected to have grown about 2.3% in 2013 and forecast at 2.75% in 2014.
While the percentages are not huge, it is worth remembering that New Zealand’s GDP is about $150bn $US – so a 3.4% increase is about $5.1bn $US additional activity on top of what was happening before. That makes a difference!
The HSBC economist based the ‘Rock Star’ comment on three factors – Construction and other spending in Canterbury, the housing ‘boom’ being driven by low interest rates and immigration and finally rising Dairy prices, driven by Chinese demand.
While there is no doubt the Christchurch rebuild is a huge contributor to growth, it is worth remembering that the earthquakes and their aftermath did a lot of economic damage, so part of the growth is simply replacing what would have happened without the earthquakes. Something like the rebuild can show how strange economics can be too – hearing economists you would almost think we should be glad to have the rebuild – when of course the earthquakes were a shocking tragedy which we would all have been better off without.
Taking the thought to extremes it would be ‘good’ economically to destroy a city every few years to boost growth…..which is clearly madness.
Second was the housing boom. Reports out in the last day or so indicate that the Reserve Bank may now be looking to raise the OCR as soon as next week (it was planned for March) and it is likely to go up 4-5 times this year. This will have a big impact on slowing economic growth as interest costs for everyone increase (although savers will be happy with higher returns on their deposits). Given the other factor, immigration, it is difficult to know whether higher interest rates will actually slow the housing market - which is only booming in Auckland and Christchurch anyway – or not.
There is no doubt it will be an anchor on economic growth, from taking money out of people’s pockets, to making businesses less likely to invest in expansion.
The final factor is the strong dairy prices. These look to remain strong and will continue to be driven by demand from China, although the stronger they are the higher the New Zealand dollar is likely to climb – particularly as the OCR rises, which in turn means exporters receive less for their products. Over a longer timeframe China will also look to increase its supply of dairy products, thereby reducing reliance on New Zealand (as it did with supply of Iron Ore and other things supplied by Australia)
So, the signs are broadly good for the economy, but there are no guarantees in this game!