NZ on track for another year of solid growth

New Zealand is on track for another year of solid growth. This week we take a look at what will underpin growth, and what the current softness in inflation may mean.

Shift in the drivers of growth

In recent years, growth was underpinned by strong increases in export commodity prices and the related gains in export earnings. However, prices for some of our key exports have since fallen sharply, and dry conditions are threatening to stymie agricultural production. Although dairy prices did pick up at the most recent auction, these developments will be a significant drag on export earnings over the coming year.

Despite these concerns, the New Zealand economy is still expected to grow at a robust pace over 2015. The drivers of growth are shifting away from the export sector and towards domestic demand. In large part, this is a result of a strong outlook for construction spending, which is expected to rise to levels above those seen during the mid-2000s construction boom.

Contributing to the expected strength in construction is ongoing reconstruction in Canterbury, with increases in residential and non-residential spending planned over the coming year. But the robust construction outlook isn’t just a Canterbury story. Strong increases in residential construction are also expected in Auckland, where recent sales figures showed that housing market remains hot (house sales in Auckland were up 27% in the last two months and prices were up 13.5% on a year ago). This follows strong population growth and low building in recent years, which have added to demand and supply pressures. On top of this, solid increases in nationwide infrastructure and other non-residential investment spending are expected over the coming years, with continued firmness in the latest non-residential building consent figures.