Economy grows, but more cuts predicted

Economy grows, but more cuts predicted

The latest growth figures were better than expected. But several economists believe that will not prevent another interest rate cut.

GDP rose by 0.9 percent in the final three months of last year. That was 0.2 percent better than expected. The numbers were driven by population growth, construction, retail spending and tourism.

The stronger than expected figures helped the economy grow by 2.5 percent for the whole of 2015.

But economists say if you strip out the effect of a larger population then New Zealand's economic growth was almost flat.

Westpac economist Michael Gordon says "On the face of it, annual GDP growth of 2.5 percent looks decent, but much of that reflects the weight of numbers: strong net immigration meant that the population rose by almost 2 percent over that period.

"Per capita GDP growth remains relatively sluggish, and well off the pace seen in the previous few years. Slow per capita growth does not suggest a particularly rapid reduction in the ranks of the unemployed, or a significant pickup in inflation pressures."

The increase in people being available for work means that employers do not have to be so generous with wage increases. Wages fell by 0.4 percent last year on a per capita basis.

Weak wage and prices increases are keeping a lid on inflation, which is well below the Reserve Bank's target range of 1 to 3 percent.

The thinking is that if prices aren't rising by much, then people might opt to hold off on their spending in case prices fall even further. If people hold off spending the economy slows, impacting on employers' ability to offer wage increases. The slowdown can start to become a self-fulfilling prophecy.

ANZ believes that the OCR could fall to 1.75 percent by the end of the year.

It says "This data is historical and we are now well into 2016, with slowing global growth, dairy wobbles and tightening financial conditions flagging downside risks. Viewed in combination with low inflation and easing inflation expectations, that's an environment where the odds favour an even lower OCR."

BNZ Head of Research Stephen Topliss says "We anticipate a cut to 2 percent in June, but concur with the view that risks are tilted toward the OCR ultimately being cut below 2 percent."

ASB is picking a rate in June of 0.25 percent to 2 percent, but says the odds have increased that the Reserve Bank might move sooner.

AMP predicts that growth will average 2.6 percent for the year and it is predicting a rate cut in either April or June.

A rate cut would be welcomed by dairy farmers facing a sharp fall in farm prices in recent months.

The Real Estate Institute says its Dairy Farm Price Index fell 14.3 percent in the three months to February, compared to the three months to January.

The Index fell by even more -- 20.9 percent -- when compared to February of last year. The Institute says its Index takes account of variations in farm size and location.

The numbers have been released in the same week in which the Reserve Bank released details of stress tests it conducted to see how the commercial banks would cope if there was a sharp downturn in farm prices.

The RBNZ says the trading banks' balance sheets are "robust" enough to cope with potential losses of up to $3 billion dollar.

Total dairy lending in New Zealand is $38 billion. That is about ten percent of all lending.

Watch Tony Field's Talk Money segment above.