Growing pains for key industries

Booming population growth will keep the economy growing for the next two years, despite a slowdown in key industries, new forecasts predict.

ASB’s latest forecasts show the New Zealand economy expanding by 3 per cent in 2017, accelerating to 3.5 per cent in 2018.

The rosy outlook comes despite warnings that two of the main drivers of recent growth – tourism and construction – are experiencing growing pains.

‘‘The surge in visitors to New Zealand over the past few years is increasingly stretching accommodation capacity and, while that’s spurring more hotel investment, it will take some time to catch up,’’ ASB chief economist Nick Tuffley said.

‘‘Overall construction growth will also slow, and mainly be reduced to areas such as Auckland and Wellington, which will continue to struggle to build fast enough to meet population growth demands.’’

ASB has also warned that its forecasts could be undermined by global shocks, pointing to North Korea and Syria as ‘‘diplomatic powder kegs’’.

But Tuffley said that behind the ‘‘noise’’ the outlook for global growth was reasonable.

‘‘The Trump-led swing to trade protectionism has not been as bad as feared.’’

Other banks have warned that New Zealand’s economic growth is poised to ease, with BNZ predicting on Friday that the growth phase appeared to be ‘‘peaking’’.

‘‘This is manifesting in capacity constraints and slowing productivity,’’ BNZ senior economist Craig Ebert said.

‘‘As this plays out, inflation is firming up, which will, in time, force a reluctant [Reserve Bank] to lift its cash rate.’’

BNZ forecasts that growth will slow to 2.7 per cent this year and to 2.5 per cent in 2018.

Earlier this year the Reserve Bank signalled that it could leave the benchmark official cash rate (OCR) at the current record low rate of 1.75 per cent until at least the end of 2019.

It hinted that it believed there was an even chance the next move could be down.

Since then inflation has risen much more quickly than expected, climbing above 2 per cent for the first time since 2011.

The New Zealand dollar has fallen below where the Reserve Bank expected it would and on Friday, the bank’s survey of inflation expectations jumped sharply.

The survey showed inflation is expected to be 2.17 per cent in two years, up from expectations of 1.92 per cent three months ago.

While the survey, coupled with figures showing stronger than expected jobs growth at the start of the year, came too late to be included in the Reserve Bank’s latest forecasts, governor Graeme Wheeler is expected to give a stronger indication that the OCR will rise, in time.

Westpac’s acting chief economist, Michael Gordon, said that there was little pressure to raise interest rates soon, given that inflation was likely to hold at around 2 per cent for up to the next two years.

‘‘Nevertheless, the Reserve Bank will have to acknowledge how conditions have changed in the last three months,’’ Gordon said.

‘‘We expect the Reserve Bank’s latest interest rate projections to be consistent with an OCR hike by late 2018.’’