Predictions of interest rate rises have been brought forward 12 months in ASB's latest Quarterly Economic Forecast. Chief Economist Nick Tuffley now expects the RBNZ to begin raising the OCR from its current level of 0.25% as early as August next year.
However, Mr Tuffley says a rate rise will not occur until the New Zealand border is open. He says the RBNZ will also want to be confident the economy is heating up, that labour market capacity pressures are firming, and that inflation settles above 2%. An OCR rise by August next year is a full year earlier than was predicted just three months ago in the November ASB Quarterly Economic Forecast.
Rates rises for our major trading partners are expected to further away, with Mr Tuffley saying central bankers will want to make sure the current rebound is entrenched before raising policy interest rates. "We expect the US Federal Reserve and the Reserve Bank of Australia to be firmly on hold over at least the next 12 to 18 months."
Mr Tuffley says the past year has been a wild ride for New Zealand. From a sharp COVID-19 contraction to a swift rebound at the end of 2020, he describes the New Zealand economy as one of the first to see the sun come up after the COVID eclipse.
"New Zealand has so far come through this in a way that is astonishing compared to predictions from 2020, however, as we saw last week, things can change quickly, and we are going to have to keep on rolling with the punches."
After contracting 12.1% over the first half of 2020, the economy bounced back significantly, posting a 14% lift in GDP in the third quarter, taking the economy back above pre-COVID levels. GDP is now forecast to reach 0.7% above year-ago levels by the December quarter. By comparison, if the pandemic had not occurred, the forecast for annual GDP growth would have been approximately 2.5%.
The latest ASB Economic Forecast shows while some parts of the economy have faced headwinds, the construction industry has easily lifted above pre-pandemic levels.
"We expect most of the growth in economic activity over the first half of this year to come from the construction sector. The housing market remains under supplied, and low interest rates and rising house prices have stoked construction appetites with building consent demand surging in the latter months of 2020," says Mr Tuffley.
From a global perspective, better-than-expected momentum towards the end of 2020, predictions of a vaccine-led recovery and the prospect of further economic stimulus have bolstered international sentiment over recent months and prompted analysts to re-evaluate their forecasts.
"Although grim COVID-19 news continues to dominate international headlines, the continuing rollout of the vaccine globally is providing a light on the horizon. With the new administration, the US economy is likely to receive significant stimulus in the coming months and highly accommodative central bank policy settings mean the global economy is continuing to receive strong support. All-up, global growth forecasts for 2021 have been nudged up since our last quarterly, although there is still some way to go.
"Meanwhile the vaccine rollout and anticipated increased spending have triggered a global sharemarket boom, with commodity markets also seeing a sharp upswing. Oil prices are nearing 12-month highs and dairy prices have surged at recent auctions, both of which Mr Tuffley says are benefitting New Zealand.
"The New Zealand economy has proven to be more resilient than expected over 2020, but we remain cautious on the pace of growth over 2021 and 2022. We see growth prospects being relatively muted over 2021, with the closed border and weak global growth limiting our export performance. The Government hopes to roll out vaccinations over the second half of the year, but there remains risks and uncertainties, with potential for production delays and COVID-19 mutations reducing vaccine effectiveness."
"In our view, it will be some time during 2022 before the New Zealand and global economies properly enter 'recovery mode' and allow for above-average rates of GDP growth."
The latest ASB Quarterly Economic Forecast will be available online at https://www.asb.co.nz/documents/economic-research/quarterly-economic-forecasts.html
Other recent ASB reports covering a range of commentary can be accessed at our ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html