HSBC Australia and New Zealand's Chief Economist Paul Bloxham speaks to Bernard Hickey in the Double Shot Interview above about the outlook for the New Zealand economy, the Australian economy, New Zealand's Official Cash Rate (OCR) and the Chinese economy.
Bloxham said the New Zealand economic outlook was positive with support over the next year from the Rugby World Cup, the Christchurch earthquake rebuild and high commodity prices.
He said New Zealand was starting the recovery with inflation near the upper end of the target band. See more here in our earlier article about inflation expectations.
"So I think that interest rates will probably need to rise from here in order to get rid of that inflation problem," Bloxham said, adding New Zealand's economy was starting its recovery with a relatively high inflation rate. High inflation globally would not help.
"Asia has an inflation problem and further quantitative easing or further easing of monetary policy in the Western World will further exacerbate that problem," he said.
HSBC's central forecast was for two OCR increases by the end of the year and a rise of around 175 basis points over the next 18 months.
Bloxham said the focus of the New Zealand economy was shifting from housing-market driven consumption to export driven production.
Australia's economy was overall doing well, although there was a divergence between high investment in mining, but weak consumer, retail and manufacturing sectors, partly because of the high Australian dollar.
New Zealand exporters to Australia's consumer economy may feel that weakness.
"Unless you're really tied into that mining story, you probably won't see as much of the income coming your way," he said.
Positive on China
Bloxham said China's economic outlook was positive with growth over the last year of about 9.5%, with China and the emerging economies at the heart of global economic growth.
"Domestic demand is driving a lot of what is happening now in China. It's not so much driven by the export contribution. The middle class is expanding, domestic consumption is growing and there's an extraordinary amount of investment going into infrastructure that is holding up commodity prices, " he said, adding HSBC saw that growth continuing.
"The Chinese economy has quite a deal of structural expansion to come. There's a lot of urbanisation to come so there's still a long way to run in that boom," he said.
Bloxham agreed that some of the infrastructure spending may be of a poorer quality and generate some bad loans.
"But you've got to keep in mind that China is enormous. There are 680 cities in China. There are 93 cities in China with more than five million people. So when you hear these stories of local governments struggling, you've got to keep in mind that the central government is actually in an extraordinarily good position and could still afford to support the economy if required, and has relatively low debt levels," he said.
Bloxham said the combination of China and India was now 50% larger now than four years ago, while the North Atlantic economies (US, Europe, Canada) had actually contracted.
Growth globally was already being driven by China and India, he said.
'Can kicking'
Bloxham agreed European authorities had 'kicked the can' of high debt down the road, although America still had more room to act.
"What we've seen since the Global financial Crisis is a shfit of debt to the public sector from the private sector and now it's at a point where it needs some sorting out. This is the key thing that's driving volatility in financial markets -- that uncertainty about what policymakers might do and whether they're capable of supporting the economy," he said.
"The main thing is that global growth is now being driven more by the emerging economies than those (European and US) economies. Although those markets get a great deal of focus in the media, you've got to keep in mind that a lot of the growth is coming from somewhere else."
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