13 May 2014 - The latest edition of Westpac’s Economic Overview finds encouraging signs that the economy still has room to grow without generating excessive inflation.

Dominick Stephens, Chief Economist of Westpac, says that in his introduction to the bank’s latest quarterly Economic Overview that it’s time to ease up on the pessimism.

‘It might sound odd to label ourselves pessimists – we spent a great deal of the past two years arguing that New Zealand would go through a period of very strong GDP growth,’ he writes. ‘But pessimistic we were, because we viewed the economic upturn as mainly a temporary post-earthquake rebuild and an interest-rate induced house price blip, not a permanent improvement in New Zealanders’ standard of living. Without any improvement in the economy’s capacity to produce goods and services, we felt that rapid economic growth would soon degenerate into inflation and OCR hikes.’

‘That basic idea is still valid. Everybody agrees that the OCR is heading higher in the near future. But this quarter, we are giving the economy just a little more credit where credit is due. We have moderated our OCR forecast, to a peak of 5.25 percent, without significantly changing our GDP forecast.’

‘One reason we have become more constructive on New Zealand’s capacity to grow is labour supply. Because so many people are pouring into the labour force, wage growth has remained subdued despite firms going on the biggest hiring binge in a decade. It is also apparent that firms are moving up the productivity ladder by investing avidly in plant and machinery. Greater productivity means firms can produce more at lower cost, helping to contain inflation.’

‘Of course, there are more immediate reasons inflation has been low recently. First and foremost, the high exchange rate – we see no significant change on that front this year. Second, low inflation is actually a global theme, which is why we expect the big central banks to keep interest rates low for a long while yet, even as their economies experience modest recoveries.’

Dominick Stephens does note that this September’s election poses a risk to forecasts, and a special topic covered in the publication is what the election might mean for financial markets. In the franchise sector, electoral uncertainty has traditionally slowed franchisee recruitment for a couple of months; however, with franchisor confidence bouncing back after several depressed years, unless there are unexpected developments the 2014  election seems likely to cause only a minor blip.

Read the full Economic Overview.