An economic boom is under way in New Zealand in an election year, and during the upswing the Kiwi dollar could pass the Australian dollar.
New Zealand has begun an economic boom that could drive its currency past Australia’s for the first time in four decades, HSBC Bank Australia says.
The bank rates the rebuilding of earthquake-damaged Christchurch – one of three things driving the economy – as an economic force as important to New Zealand as the resources boom of the last decade was to Australia’s economy.
“New Zealand is set for a strong 2014, with the economy already firing on all cylinders,” Adam Richardson and Paul Bloxham of HSBC Bank Australia say in a report.
New Zealand is likely to outperform almost all other OECD economies in 2014, except Chile, Israel and Mexico.
HSBC forecasts gross domestic product (GDP) will expand by 3.4 per cent in 2014, up from 2.8 per cent in 2013.
The New Zealand dollar will rise to 87 US cents by the end of 2014. It was 82.46 US cents at 5pm on Friday.
“It may surpass parity against the Australian dollar for the first time in four decades,” the report says.
The NZ dollar was at 92.63 Australian cents at 5pm on Friday.
The Reserve Bank of New Zealand (RBNZ) estimates the reconstruction activity in Canterbury will total $NZ40 billion, equivalent to 20 per cent of annual GDP.
“To put this in context, this scale of activity is similar in terms of its share of the economy to the resource investment boom Australia experienced through the last decade – a factor that has dominated the economic landscape in Australia recently,” the HSBC economists say.
New Zealand’s role as a provider of 60 per cent of China’s dairy imports will also drive growth.
A third driver is a housing boom, which is expected to continue.
The economists do not expect the general election this year to upset the economy.
The fact that the New Zealand economy is already operating near capacity may be a problem, forcing the central bank to raise interest rates to quell inflation.
“We expect the RBNZ to be the first developed world central bank to lift rates in this cycle,” the economists say.
They say the official cash rate, currently at 2.5 per cent, may by 3.5 per cent by the end of 2014 and 4.5 per cent by the end of 2015.
The first rise is “likely to arrive soon”.