The New Zealand economy is expected to grow at about 3 per cent a year out to 2017, driving jobs growth and reducing the unemployment rate, according to the NZ Institute of Economic Research's quarterly predictions.
The institute estimates 130,000 jobs will be created over the next two years, with the unemployment rate dropping to 5.2 per cent by early 2017, from 5.8 per cent currently. Wage growth will be "somewhat muted" at about 2.5 per cent, reflecting broadly weak inflation and the impact of strong net inbound migration, which is expanding the workforce, it said.
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With little inflation, the institute expects inflation to stay below the mid point of the Reserve Bank's 1 per cent-to-3 per cent target band well into 2017. But even combined with an uncertain global outlook, the bank probably won't see scope to raise interest rates until mid-2017 because of concern it could inflame Auckland's housing market.
The institute said the economy does face challenges. The decline in dairy prices would strip $6 billion from rural incomes, while the Auckland housing market is vulnerable to a sharp correction.
