ASB pundits head into summer on upbeat note

Golden Weather: ASB is forecasting a sunnier economic outlook for the summer months

ASB economists are finishing the year on an upbeat note with their latest Quarterly Economic Forecast emphasising the New Zealand's economy's fair winds as we head into the summer break.

They are picking GDP growth to hold up better than previously forecast but see interest rates staying on hold for longer.

"It's been a year battered by storms but the signs are there that the economy is slipping into some summertime stability," ASB chief economist Nick Tuffley said.

"Despite two high-profile uncertainties – stubbornly-weak business confidence and escalating trade tensions between the US and China – we expect that growth in the last part of 2018 and early 2019 will be only a touch softer than what it could have been."

He is picking that the GDP growth for the final past of the year will be just under three per cent.

"While surveying shows us that uncertainty about Government policy is still impacting business confidence and keeping it at low levels, we are encouraged that, to date, there are few tangible signs that the plunge in business confidence has filtered through to economic growth," he said.

"Capital goods imports are holding up, as is credit growth to business. And as the Government firms up key policies, over time the uncertainty business is feeling should reduce."

Tuffley was less optimistic about the chances of global trade tensions abating any time soon but noted that so far the impact on New Zealand had been limited.

"We need to keep wary eyes out for any slowing of Chinese consumer spending growth due to increasing trade restrictions such as tariffs placed on Chinese exports to the US," he said.

ASB Economists expect the Reserve Bank to keep the OCR on hold at its record low of 1.75 per cent until August 2020 - six months longer than their previous quarterly prediction.

There have been concerns that tensions between China and the US would affect the local economy. Photo / Getty Images

They expect a very mild RBNZ tightening cycle peaking at just 2.75 per cent from late 2021.

"This is because the RBNZ will be mindful of not getting policy settings too far out of sync with other central banks," Tuffley said.

There were some risks around rising household costs, he said.

Rising costs for necessities - fuel, rent and food - were putting the squeeze on households, particularly those with less disposable income and tighter budgets.

"Areas of the economy that are exposed to discretionary spending are likely to be vulnerable in the short term," he said.

However, he noted that the recent slump in oil prices may relief some of that pressure.

The Quarterly Forecast concludes that the "key test for the economy over the summer and autumn will be the ability of firms to pass on increased costs onto consumers".

"If firms find demand is not strong enough to absorb higher prices, economic growth and core inflation could slow over the next six months," Tuffley said.