New Zealand is expected to have a bigger growth rate in 2014 as Westpac bank raises its growth forecast to 4.2 per cent from the previous rate of 3.8 per cent. The bank revised its predictions following New Zealand's strong trade performance.
In Westpac's recent economic review, the bank expects the Kiwi dollar to trade above $80 U.S. cents against the U.S. dollar and over 90 cents against the Australian dollar all the way to 2015.
New Zealand's terms of trade index, which measures changes in export prices against import price, has risen by 7.5 per cent in the September quarter. The change is significant since the index reached a level not observed since December 1973.
According to Westpac, the rebuilding of earthquake-damaged Christchurch, Canterbury, is giving New Zealand's economy a substantial boost in its GDP, but the high exchange rates kept inflation rate at bay and interest rates low.
Although the low interest rates have brought the side effect of double-digit house price inflation, consumer spending still increased among households and businesses. Westpac predicted that the Reserve Bank of New Zealand will increase its cash rate to 3.75 per cent by the end of 2014. The current rate is 2.5 per cent. When interest rates increase, house prices may experience slower inflation rate.
Westpac remains optimistic that the low interest rates and the Canterbury rebuild will be major economic drivers in New Zealand for 2014, but their growth rates may have passed their peaks, according to the bank's chief economist, Dominick Stephens.
However, Westpac believes a third factor to help drive growth will be New Zealand's high terms of trade which will sustain national income. Mr Stephens said the economy will reap the benefits of this new growth driver with sustained high export incomes expected to have a positive impact.
In December, it was reported that New Zealand's economic growth was faster than most countries, including Australia. According to Finance Minister Bill English, the latest statistics revealed that gross domestic product (GDP) growth of New Zealand was 3.5 per cent in Sept compared to 2.3 per cent of Australia's GDP.
Economic growth in the United States in the same period was 1.8 per cent, Britain with 1.5 per cent, Canada with 1.9 per cent and Japan with 2.4 per cent.