Solid outlook for the NZ economy

Arriving passengers head for customs declaration lanes at the Auckland International Airport arrivals hall. Photo / File

Strong net migration, tourist inflows and improving rural sector incomes point to a continued solid outlook for the New Zealand economy, the NZ Institute of Economic Research says.

The consultancy's senior economist, Christina Leung, says the country's annual growth is expected to track around 3 per cent on average over the next five years.

"Strong population growth and tourism activity is supporting a ramp-up in construction activity, with robust demand for residential construction and new hotel developments and office space," she said.

"Capacity pressures are evident in the construction sector, but labour shortages are being alleviated by migration."

Ms Leung said Fonterra's upward revision last week to the dairy payout for the current season and a higher payout forecast for the next season would provide an income boost to the rural sector.

In contrast, the global backdrop remained highly uncertain, with heightened geopolitical tensions presenting a downside risk to the global growth outlook.

Ms Leung said underlying inflation in New Zealand was still expected to lift over the coming years and keep the annual consumer price index around 2 per cent over the medium term.

She said the expectation remained that the Reserve Bank would begin lifting the official cash rate in mid-2018.

"The lift in CPI inflation back to around the mid-point of the Reserve Bank's 1 to 3 per cent target band has taken some of the pressure off the central bank," she said.

"This, combined with inflation expectations lifting, means the focus has turned to when the Reserve Bank will begin lifting the OCR."

Although the central bank had indicated it expected to remain on hold until later in 2019, Ms Leung said recent developments suggested an earlier tightening.