Only a few weeks ago I presented on stage with Tony Alexander (BNZ Chief Economist) about the forecast for the New Zealand economy in 2014. (See my full presentation here). The word on the ground is that 2014 is going to be an epic year, and in general the feeling is one of enthusiasm. The Year of the Horse may well turn out to be the Year of the Racehorse.
Predictions are that our economy will experience the strongest growth since 2007 (the start of the recession). The forecast is for at least 3.3% growth, significantly higher than the average for nations in the OCED, which is 2.3%.
Why do we, economists, and many of our clients think 2014 will be a thoroughbred year?
- Business confidence is the highest it has been since 1999. Businesses are likely to focus on growth, resulting in increased profitability, employment of more staff and higher wages.
- Consumer spending is up - retail sales over Christmas were 7% higher than last year.
- The Canterbury rebuild will stimulate the economy.
- There has been good performance in the rural sector after the recovery from last summer's drought, and this is expected to continue.
- There is increased demand for dairy products internationally.
- All sectors of the market are growing, and MYOB CEO Tim Reed expects the construction/trade and manufacturing/wholesale sectors to perform particularly well.
- Building consents are the highest they have been since 2008.
- The NZ share market has performed better than others worldwide.
- Unemployment is decreasing and is expected to be as low as 5.2% by the end of the year, which is considered to be full employment.
- The housing shortage continues, meaning house prices will keep rising - over 10% is anticipated in Auckland and Christchurch. Rents are also expected to increase.
- Expected surplus in the Budget.
Racehorses are often flighty and their temperaments pose some difficulties. The challenges 2014 may bring include:
- Inflation may rise from its current 1% if demand for industry exceeds supply. This is particularly likely in the construction sector due to the Christchurch rebuild.
- The booming housing market (especially in Auckland) may have a negative effect on the economy. With so much borrowing, a drop in house prices could have drastic results.
- Interest rates may rise if the new LVR rules don't regulate the housing market.
- The market for dairy products globally can be temperamental.
- The high NZ dollar eats into returns for exporters.
- The uncertainty that comes with 2014 being an election year could have a negative effect in some sectors of the market - share prices may be more volatile for instance.
- With unemployment dropping, it will be harder for business owners to find good staff.
While thoroughbreds have excellent physique and form, their speed and temperament needs to be harnessed and nurtured to best advantage if they are going to win any races. For 2014 to reach its maximum potential we suggest the following:
- With the likelihood of interest rates rising to 8% (as estimated by Governor of the Reserve Bank, Graeme Wheeler), those with mortgages should fix their loans at current rates for as long as possible. Conversely, avoid interest-earning investments with long-term fixed interest rates.
- Don't overextend yourself with the share market. While it is likely to be a good year for share growth, many shares are already near their peak value due to the fact that share prices rise based on expected growth, not after it has occurred.
- New Zealand's high dollar provides an opportunity to benefit from investing money offshore.
- With an expected shortage of skilled workers in many sectors, this can be a good time to up-skill.
- With business growth comes rapid change, meaning businesses will need to be organised and adaptable.
- Property will continue to rise in value but only in the major cities and you will need to make sure you work your figures around a 7-8% interest rate otherwise it will be costly in the long run.