Oct 21, 2013

New Zealanders need to brace themselves for an economic boom.

It sounds crazy because good growth sure beats a recession, but after five years in the doldrums we may not be prepared for the strength of the rebound that economists are now tipping.

Next year the country will be “firing on all cylinders”, says Paul Bloxham, HSBC’s Sydney-based chief economist for Australia and New Zealand, in his latest report.

Bloxham is confident that we’ll be booming next year with GDP growth headed for 3 per cent and beyond.

His report, titled New Zealand’s boom, sets the tone for the way the rest of the world is starting to look at us.

Last week ANZ economist Cameron Bagrie noted that latest business and consumer confidence surveys were so strong they pointed to economic growth of around 4 per cent by early 2014.

Bagrie was sceptical about that happening and suggested the economy might “blow a gasket” if it were to accelerate so fast.

But he concluded that New Zealand could be on track for GDP growth above 3 per cent, putting us amongst the strongest performers in the OECD. “It’s been a long time since New Zealand can claim such rock star status,” he said.

Even the IMF expects the growth to pick up to 2.9 per cent next year – ahead of the our Western trading partners (including Australia) and not far behind Asian nations like South Korea and Singapore.

The reasons we’re on the up are simple. Dairy prices have stayed at record high through a period of concern about Chinese growth which caused hard commodity prices to fall. Meanwhile, we are on track for record dairy production. That’s a huge boost to an economy that gets about 20 per cent of its income from cows.

Then there is the Christchurch rebuild, which should be kicking into top gear and boosting domestic activity.

The big risks to growth have been with our international trading partners. But last week the US dealt with its debt crisis, sending Wall Street to new highs, and China shrugged off signs of a hard landing with a 7.8 per cent GDP growth figure.

Bloxham is even relatively bullish about the slowdown in Australia, which he expects to be short-lived.

Yes, there are caveats on all those things – a Chinese housing bubble, more US politics – but there is a growing risk that everything might be all right.

A sharp acceleration in economic activity would bring new worries in some sectors of the economy.

We know interest rates will have to rise. But if things really boom they may have to rise faster and that will take money out of the pockets of many mortgage-holding households.

We can also expect the dollar to stay stronger for longer as the rest of the world buys into the New Zealand growth story. The higher dollar should help keep a lid on inflation but it will mean more pain for non-commodity exporters.

We could also see the economy hit capacity in sectors like construction and IT, meaning the kind of skills shortages we were worrying about until the financial crisis hit.

The upside is that increased activity would see unemployment fall and wages start to rise. But these things happen at the back end of a boom, meaning many ordinary New Zealanders will feel the pain of higher living costs first.

That’s going to make the economy a tricky sell for the Government in election year, even as the economists tell us things have never been better.

Fuel injection

* Record dairy prices and record production.
* Christchurch rebuild hits top gear.
* China growth stays strong.
* US debt default delayed, economy on the mend.
* Stock market at record highs.
* Interest rates at record lows.