Editorial: Sun shines on economy as 2014 dawns

Photo / Paul Estcourt

Strong growth and all that entails awaits in New Year.

Discussion of the economy normally disappears in the summer holiday languor, for good reason. The subject seldom inspires hopes for a happy new year. This summer it does. New Zealand is poised for an economic surge. Business confidence is stronger than it has been at any time since the recession and global financial crisis. After five years of no or slow growth, the economy is overdue for a strong recovery but that can be said of most of the world. New Zealand is one of the few places that appears to have shaken off the shackles at last.

The sharemarket has been outperforming others in the world for some time, the NZX 50 index has risen an astonishing 47.4 per cent in two years. An ANZ Bank survey of 3000 privately owned businesses has found 78 per cent optimistic about their fortunes in the year ahead, compared with 65 per cent a year previously. Their confidence in the economy has also risen - from 44 to 68 per cent in a year - and 88 per cent expect their earnings to grow this year.

The economy overall is forecast to enjoy 3.3 per cent growth this year, well above the 2.3 per cent average for the "rich club" of nations in the Organisation of Economic Co-operation and Development. The OECD predicts post-earthquake reconstruction in Christchurch will drive "robust investment" generally and it expects farm exports to recover from last summer's drought.

Business investment offers the prospect of more jobs, less unemployment and higher wages. The outlook could hardly be brighter, though of course there are always two sides to an economic forecast. Growth brings the threat of inflation if consumption exceeds the capacity of industry to supply. The OECD warns that the Christchurch rebuild will stretch our construction resources and the Reserve Bank has long said it expects to start raising interest rates this year.

The bank's restriction on low-deposit home lending since October could also be an economic dampener as it takes heat out of the Auckland property market. The OECD has warned that the loan-to-value limit "needs to be monitored and adjustments made if needed".

The new year will also bring a return to surplus in the Budget for 2014-15. That, with rising interest rates, will signify an end to the post-recession stimulus and a resumption of normal monetary caution. Not many countries are at this point in their recovery.

The United States suffered such a fearful reaction to the Federal Reserve's suggestion of a phase-down of quantitative easing last year that the Fed withdrew its warning. Nobody now knows when or how the US will recover its confidence. It is not helped by congressional brinkmanship over public debt ceilings, an issue that will return in the new year. Europe, meanwhile, continues to wrestle with its common currency, separate sovereign banks and the debts of many of its member countries.

The relative strength of the New Zealand economy may keep the dollar high against the currencies of our main markets, reducing returns from exports. But that is the price we pay for sound money, good government and excessive property investment. With house prices now 88 per cent higher in real terms since 2000, the highest increase in the OECD, the organisation warns investors are riding for a fall.

But it is hard to believe it when the summer is golden, the nation is on holiday and business is looking forward to a new year that promises to be a boomer.

Here's hoping.