We are expecting the NZ economy to keep on a relatively steady beat. GDP growth is forecast to run at an annual pace of around 3 per cent over the next 18 months (in fact quarterly annualised growth is expected to be stronger in the near-term).
After growth of 3.1 per cent over 2016 as a whole, 2017 growth is forecast to average 2.8 per cent in 2017 and 3.0 per cent over 2018. It is a pace of activity momentum which should:
• continue to see the unemployment rate gradually trend lower (which we see falling to 4.4 per cent by the end of 2018 even though labour supply growth should also remain strong); and
• result in spare capacity continuing to gradually be absorbed (we place trend growth at around 2.75 per cent).
We see inflation pressures slowly broadening. Some measures of core inflation are already at the target mid-point of 2 per cent. However, it is not a broad-based story, and still largely contained to housing. But we do see that gradually changing.
With wage growth forecast to lift off lows, non-tradable inflation should rise too. After averaging 2.0 per cent over 2016, non-tradable inflation is forecast to average 2.8 per cent and 3.1 per cent over 2017 and 2018 respectively.
But there will be plenty of factors that throw headline inflation around. Although non-tradable inflation is forecast to lift, headline inflation looks set to fall back into the lower half of the RBNZ’s 1 per cent to 3 per cent target band over the coming 12 months.