30 Aug 2017

Migration, tourism to drive strong economic growth

12:38 pm on 30 August 2017

The economy is set to grow at more than 3 percent over the next couple of years as it continues to be driven by high immigration, strong tourism, improving commodity prices and low interest rates.

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NZIER expects the economy to pick up to an annual 3.4 percent. Photo: 123RF

In its latest quarterly report, the New Zealand Institute of Economic Research (NZIER) said after a soft start to the year the economy was likely to pick up.

"Although GDP growth and inflation were soft at the start of the year, recent indicators point to a pick-up in activity from the second half of 2017", said Principal Economist Christina Leung.

"Construction demand remains very strong despite a dip in activity in the first quarter of 2017. Strong migration and tourist inflows continue to support demand for housing, hotels and office space," said NZIER senior economist Christina Leung.

Annual growth is expected to reach 3.4 percent by the first quarter of 2018 year, and remain around those levels until 2020, when it would soften again.

Fonterra's upward revision to its milk price payout forecast for the next season means profitability is continuing to improve for the rural sector. Although farmers remain focused on paying down debt we expect an improvement in on-farm investment over 2018", Ms Leung said.

Annual net migration would remain at about 70,000 into early next year, and gradually fall to about 44,000 in early 2021, and the strong labour market relative to other developed economies would continue to attract immigrants, she said.

Inflation is expected to have eased to just above 1 percent but that will be the low point and price pressures would start to rebuild to around 2 percent, the midpoint of the Reserve Bank's target band.

Ms Leung said the subdued inflation pressures backed the central bank's approach of holding interest rates unchanged for an extended period.

"We now expect the Reserve Bank to leave the OCR [Official Cash Rate] on hold until November 2018. Recent developments afford the Reserve Bank time to assess the situation before commencing its tightening cycle."

The Reserve Bank's benchmark rate has been at a record low 1.75 percent since the end of last year, and the bank has indicated it does not expect to raise rates before the end of 2019 at the earliest.