Recovery will be shallower than expected, say NZ economists

Housing construction is predicted to surge by 24.5 per cent in 2013. Photo / Paul Estcourt

New Zealand's economic recovery will be shallower than previously thought, reflecting delays in the Canterbury rebuild and in investment generally, according to the NZIER's latest consensus forecasts.

The forecasts are an average of New Zealand economic forecasts compiled from a survey of financial and economic agencies.

They showed economists expected growth to accelerate from 1.8 per cent in the year ending March 2012 to 3.2 per cent by 2014, NZIER said.

Forecasters were more optimistic about the global economy and exports, reflecting slightly less concern about the situation in Europe, it said.

A slow recovery and a high exchange rate will restrain inflation over the next two years.

"As a result the Reserve Bank will raise interest rates later and more gradually," NZIER said.

Forecasters expect the government's fiscal position to remain in deficit over the next three years and the current account deficit is set to worsen, reversing recent improvements.

NZIER said economic growth forecasts have been revised downwards for the second successive survey, the main driver being the later and longer rebuild in Canterbury.

It said its consensus forecasts indicated that growth would be modest in the March 2012 year - 1.8 per cent, down from a previous forecast of 2.2 per cent - but would accelerate in 2013 (2.7 per cent from 3.0 per cent) and 2014 (3.2 per cent from 3.0 per cent).

Household spending growth would remain steady without accelerating.

Public spending is slowing and a high New Zealand dollar will be a headwind for exports.

Economic growth data, which is due out on Thursday, would show a solid 0.6 per cent improvement the December 2011 quarter and 2.1 per cent on an annual basis.

Residential construction would be weak in the March 2012 year, but would surge by 24.5 per cent in 2013 and a further 26.7 per cent in 2014.

Inflation forecasts have been revised lower from 2.4 per cent in the next three years to 2.1 per cent in the latest survey - comfortably within the Reserve Bank's 's 1 per cent to 3 per cent inflation target.

Weak economic growth and contained inflation means interest rates will remain low for longer. Economists expect modest increases in interest rates to begin in late 2012 or early 2013.

The New Zealand dollar will remain elevated on a trade weighted basis, reflecting worse economic conditions overseas, particularly amongst key trading partners like the Eurozone and the United Kingdom.

The current account deficit will deteriorate again, from $9b in 2012 to $13.2b by 2014, NZIER said.

"The slow recovery has meant a pullback in recent investment, reducing the need to borrow from overseas," NZIER said. "But national savings remain too low, meaning the deficit will widen as investment recovers."

A slow economic recovery will keep the fiscal position in deficit for longer. The fiscal balance will improve from a $13b deficit in the June 2012 year, but remain in a $2b deficit in 2014, despite the government's austerity measures.

Forecasters expect the unemployment rate to ease from 6.3 per cent in March 2012 to 5.2 per cent by March 2014. This will feed through to wage gains, averaging 1 per cent a year after accounting for increases in living costs.

This will feed through to a gradual recovery in retail spending, NZIER said.