A string of positive economic data over recent months has scuttled hopes of further rate cuts. House prices, meanwhile, are showing no signs of slowing.

Some of the ill winds that have buffeted the New Zealand economy in recent months – including electricity problems and the impact of the SARS outbreak in Asia on tourism and trade – appear to be abating. The domestic economy has remained remarkably resilient in the face of export sector weakness. Ongoing employment gains, which have seen the unemployment rate fall to near 15 year lows of 4.7%, and strong net immigration, continue to support retail spending growth and housing market activity.

Positive economic data
A string of positive economic data points to continued economic sunshine through the remainder of 2003. Recent developments include:

• Employment continued to grow in June, up 0.8% over the quarter. Growth was driven by solid gains in full-time employment.
• The SARS outbreak and electricity problems have both abated.
• Business confidence is rising after recent lows.
• Housing market activity and prices continue to show little sign of slowing.

House prices rising strongly
The upbeat economic outlook is further boosted by the latest house price figures. According to Quotable Value New Zealand Limited, house prices increased 1.7% over the June quarter. The increase followed a big upward revision in the March quarter figures to 5.3%. Nationally, house prices jumped 14.2% over the year to June.

Retail sector strong
Coming hard on the heels of recent strong employment and wage data, which together suggest further growth in household incomes, came encouraging retail sales data for the June quarter. Retail sales increased 0.3% in June, driven in part by a 1.5% increase in sales adjusted for price movements. The result was significantly stronger than market expectations and points to continued strong domestic demand. The continuing strength of the housing market was evident in demand for appliances, with appliance retailing up 4.2% over the June quarter. The sharp drop in overseas tourist arrivals due to SARS led to a 1.7% drop in sales in cafes, restaurants and the takeaway food sector.

Concerns about currency remain
New Zealand’s strong currency remains one of the few clouds on the economic horizon. The Reserve Bank of New Zealand (RBNZ) has consistently signalled concern about the impact of the strong dollar on exporter returns. The RBNZ has noted that if export sector activity continues to soften significantly, then further reductions in the cash rate may be required.

Global environment looking up
While the export sector remains under pressure from a strong NZ dollar, the global economic environment has brightened at least a little. There are emerging signs of a more concerted recovery in the US economy. Indeed, August consensus forecasts for major trading partner growth in 2003 have stabilised at 2.4%. We are also seeing upward revisions for growth in the US and Asia although these are offset by downward revisions for Europe. Signs of recovery in the US economy have largely extinguished the fears of deflation that had driven US 10-year bond yields down to more than 40-year lows of around 3.1% during June. Yields have risen sharply, recently topping 4.6%.

Taken together, the above economic trends and data point to continued steady economic growth this year. The bad news for home buyers and borrowers is that rising house prices and a stronger economy reduce the chances of lower interest rates.

This article was collated from recent ANZ economics publications. View the latest latest ANZ Market Focus