Economy Hub at the Pub: NZ at crossroads - will it get better or worse?

The New Zealand economy is at the crossroads, says economist Christian Hawkesby.

As today's Reserve Bank made clear in its OCR statement today, keeping its options open to moving rates up or down - we need to be ready to cope with change in either direction.

After an unusually long, slow expansion things have started to slow but it is still unclear whether the economy will continue to track along a "Goldilocks" path of low inflation and steady growth or whether we'll head into rockier territory, Hawkesby says

Talking over a beer - as part of the Economy Pub at the Pub video series - Hawkesby looks at the positive and negative scenarios for the economy.

He also discusses how economists pick there way through optimistic and pessimistic scenarios to make realistic forecasts.

So on the good news track we have some fiscal spending coming - in the US by way of tax cuts and locally by way of Government investment, Hawkesby says.

"That might give legs to a further expansion in the economy," he says. "And if that's an environment where inflation stays low and interest rates stay low too, then that's a good combination."

Unfortunately there is also a less positive path and with the current expansion coming up on nine years there was a risk it might just peter out, Hawkesby says.

What would make that particularly tough would be to see inflation picking up at the same time as that would limit the Reserve Bank's ability to respond but cutting interest rates.

When faced with a range of possible paths it was important to keep an eye on the central scenario, he says.

That was the one that seemed most likely.

"Our central scenario is not where growth slows really sharply, Just that we moderate from growing at 3 and a half to 4 per cent to 2 to 2 and a half," he says.

Perversely though, the central case very rarely pans out as forecast because events happen.

So then you needed to look at possible shocks like - trade wars or market crashes - and assess how well placed we are to absorb those.

There is some to truth a view that brokers and traders tend to be more optimistic in outlook while economists (and economic commentators) tend to be more pessimistic, Hawkesby says.

Hawkesby say his personal view is that we may be facing a tougher road than expected in the next year or so.

It is going to be very hard to replicate the kind of growth we have seen in the past few years, he says.

"If you look at equity market returns, they've been phenomenal. We think there is a need to reset expectations. Economies and markets don't go up in a straight line. There will be volatility."