BNZ chief economist sees higher house prices, more people in employment, good wage rises, and stronger company profits

Higher house prices, more people in employment, good wage rises, and stronger company profits could all be on the menu for 2014, according to BNZ chief economist Tony Alexander.

In his last "Weekly Overview" for the year, Alexander has done some crystal ball gazing and offered some advice for the year ahead.

In regard to house prices, he said "the chances are" that they will rise in response to accelerating population growth running up against resource constraints  and therefore limiting the "supply response" - IE how many new houses can be built.

"Investors and first home buyers will look to purchase outside of Christchurch and Auckland and an aging population will start to sell in Auckland to retire with spare dosh elsewhere."

Alexander thought, however it would "take a few months" for first home buyers to re-engage with the market following the LVR rule imposition. Latest Real Estate Institute figures showed the house sales volumes were down 6.6% in November compared with a year ago, with a big drop-off of sales among lower priced houses - which suggests a big drop-off in the number of first home buyers.

In more general terms, Alexander said BNZ economists saw a number of reasons to be optimistic about the environment in the year ahead.

"The big no-brainer is the rebuilding of Christchurch, which, when combined with the lift in house building in Auckland, rising infrastructure spending, investment in dairy conversions, irrigation, and processing, plus earthquake strengthening and water-tightening will bring a boom for the construction sector, engineering and the great number of industries associated with them," he said.

This would boost employment for a lot of people and place strains on materials prices and contractors’ rates.

Alexander said there was likely to be some catch-up inventory building and business capacity-building of a general nature plus catch-up spending by consumers after some years of restraint. Some anticipation of tax cuts may set in also as the government’s accounts continued to surprise on the good side.

"But because we start this surge in growth toward and probably above 4% with few spare resources the rise in inflationary pressures will eventually cause the tightening part of the monetary policy cycle to kick in.

"You should anticipate rising interest rates through 2014 and 2015 but not have high expectations that we will closely pick the pace of rate rises or the peak," he said.

"The world is experiencing the biggest period of monetary policy experimentation in its history and we cannot know at what speed policy will be tightened in the United States, Australia and the UK and potentially further loosened in the EU and Japan.

'Concentrate on interest rate risk management'

"You should concentrate on adopting an interest rate risk management strategy which protects you against rate shocks rather than trying to minimise your borrowing costs by adhering to a particular view of what rates will do."

Alexander said that in the coming year wages growth would accelerate "and that will be an extremely positive thing not so much in terms of higher incomes for people but in terms of inefficient businesses closing down and labour resources being reallocated to higher-paying more productive activities".

He said with the country’s terms of trade at their highest levels since 1973 and with NZ monetary policy set to tighten, the chances are the Kiwi dollar will "oscillate generally upward", though again the unpredictable monetary policy developments offshore meant that "one would be foolish" to place too much reliance upon any set of forecasts of where the NZD will be in a year’s time.

"Personally I feel that at rates above 90 Aussie cents it is a good time to ship long term money into Aussie dollars. The same for rates above 85 US cents and especially 90 should we reach that. The same goes for levels of the NZD above 53 pence. I have no view on the NZD against the Japanese Yen but see upside potential against the Euro given the deeply entrenched problems affecting that part of the world for many years to come."

Plenty can go wrong

In terms of what might go wrong next year, Alexander said there was "lots offshore" that could go awry.

"Japan’s growth rate has slowed after an initial surge above 4%. If economic reforms are not strongly enacted the Bank of Japan’s attempts to beat deflation by printing money (how desperate do you have to be?) may fail and the Japanese economy slip back to minimal growth with a shrinking population, collapsing public finances, and expensive infrastructure bringing high maintenance costs.

"Then again the economy may surge ahead driven by a popular desire to be strong against China."

China’s growth rate will probably slow a bit further in the coming year, Alexander said.

"And as the proportion of our export revenue coming from China rises we will become, like Australia, more and more influenced by what happens not just in China’s economy but its society and politics. We will become more and more vulnerable to what seems an inevitable eventual clash between China and Japan in the East China Sea, and perhaps clash by China with other parties in the South China Sea. China claims the lot essentially, other countries including the United States have other ideas."

US 'not good'

As for other countries, Alexander said the US fiscal situation is "not good" but another Federal shut-down is now unlikely and the President has some ability to unilaterally raise the debt ceiling now.

The UK is going to spend 2014 grappling with how to keep growth going without the housing market entering a new bubble.

Australia is grappling with a costly production base causing companies in the resources and manufacturing sectors to invest elsewhere.

"There is very high uncertainty regarding which way the Aussie dollar will go next year. But with the construction sector picking up quite strongly it is likely that retailing will eventually, probably much belatedly, follow, and as long as China’s growth holds up, an acceleration in Aussie growth over the second half of the year is possible, bringing tightening monetary policy from the RBA and then perhaps fresh appreciation of the AUD."