Economic growth before ‘hangover’ in 2018 predicted

THE economy is set to grow at its best pace in a decade, with strong jobs growth, higher wages and falling unemployment, according to Infometrics’ latest economic forecasts.

Infometrics predicts growth to average 4.1 per cent over the next two years, a level last seen in 2004.

Many economists expect growth of about 4 per cent this coming March 2015 year, but Infometrics expects that recovery to carry on into the following year, as well.

It reflected the Canterbury rebuild and strong net migration, which is expected by late this year to peak at 42,000 a year.

Building work is also picking up in Auckland and other regions.

But the boom in economic growth would start to wane in 2017, after the Christchurch rebuild passed its peak.

Growth would slow to just 1.2 per cent in the year to March 2018, which would feel like a hangover, Infometrics said.

That would lead to falling interest rates and a sharp drop in the dollar around 2017 as domestic demand cooled.

In the near term, there was the potential for another rally in house prices next year, possibly returning to price rises above 10 per cent a year, after the Reserve Bank speed limits on low-deposit home loans came off and people felt more secure about their jobs.

There was also likely to be a shortage of housing, even though building work was picking up.

But strong rises in house prices in the next 18 months would leave homes ‘‘significantly overvalued’’. However, prices could fall as more homes were built in Auckland and Canterbury.

Even with dairy prices coming off their peak, returns to exporters remained at historically high levels.

The strong labour market would offset the negative effects of the short-term drop in dairy returns.