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Boom times as economy outstrips all predictions

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  • Boom times as economy outstrips all predictions

    Hi Guys

    A long article in this morning's Dominion about NZ's economy and Wellington in particular:

    Boom times as economy outstrips all predictions


    The economy has outstripped all predictions with its longest growth spurt since the 1960s. But the growing pains have the Reserve Bank worried, as James Weir reports.

    A clear sign of an economy on a roll is the growing number of construction cranes. Wellington, like many other places, has plenty of building projects, together worth hundreds of millions of dollars, and a swag of big apartment blocks on the go or on the drawing boards.

    They reflect confidence that the economy will keep growing strongly, with plenty of workers and apartment buyers to fill the new space.

    CAS Group director Craig Stewart says in just three weeks the developer sold 22 high-priced apartments in Portal, a planned development near the waterfront. The prices range from $600,000 to $850,000 - steep for Wellington.

    "There is still a good strong steady demand for quality projects," Mr Stewart says.

    Another CAS project, the $36 million 108-apartment Montreaux on The Terrace, is still months away from completion in May, but is almost fully sold – mostly to owner-occupiers rather than investors or speculators.

    The four interest rate rises imposed by the Reserve Bank this year have had no impact on demand for CAS properties, he says.

    "As long as interest rates are under 10 per cent, it doesn't seem to affect the residential market." But there has been a pullback by relatively new investors in other parts of the market – three-bedroom homes in suburbia.

    Floating mortgage rates are now about 8.25 per cent, but could rise to almost 9 per cent if the Reserve Bank keeps increasing rates, starting next week and again in October.

    Rates are rising as New Zealand generally enjoys the best run of economic growth since the wool boom of the 1950s and a growth spurt in the early 1970s. Both of those periods were relatively short.

    Apart from a brief recession after the Asian financial crisis in the late 1990s, the economy has been going strong for a decade – averaging a sterling 3.5 per cent a year, including the downturn.

    In the decade before, New Zealand growth struggled to hit 2 per cent a year.

    The sharemarkets 41 per cent rise since the start of 2003 shows the fruits of the strong economy for investors. Farmers are enjoying record world prices for beef, lamb and dairy products, though the high Kiwi dollar has taken off some of the gloss.

    On the other hand, some manufacturers have struggled with the high dollar, which economists say will probably stay up if interest rates go even higher.

    Last month, Wellington firm Interlock confirmed it was moving production overseas, part of a long-running trend of manufacturers moving out of the region.

    Manufacturing exporters to Australia, especially, are finding times much tougher with the exchange rate at A93 cents this week, compared with the mid-A80 cents range last year. At US65c, the Kiwi dollar also remains high against the American greenback.

    But some businesses are still winning. Christchurch firm Whisper Tech has landed a $300 million contract for power generation units in Britain.

    Don Tilley, managing director of Wellington sheet metal maker AE Tilley, says rising interest would be a "deterrent" for his company, which faces much higher prices for materials such as steel and aluminium.

    "Its ramping up highly and it is not something you can just pass on to customers," he says.

    The firm exports "street furniture" benches to Australia, so rising interest rates pushing the dollar to more than A93 cents make business much more difficult. "It makes margins very small."

    Tilley has turnover of about $8 million, employs more than 50 people and makes industrial walkways, shop fittings and products such as metal screens and electronics cabinets. It is trying to increase exports to replace work lost overseas – for example, the loss of jobs for Interlock and Deltec.

    "We are a lot busier than we were, but I get concerned about low profit margins and big capital expenditure to replace plant," Mr Tilley says.

    Despite that, the firm is enjoying some export success, in Hong Kong of all places. It has just sold 63 "Strand seats" for a Hong Kong railway station.

    Stranger still, Tilley is building the hulls for tourist submarines for Seabug to run trips in the harbour off Wellington's Taranaki St wharf from early next year. The 6.5-metre subs will hold 10 people and go about six metres under water.

    There are prospects for submarine exports to Australia and the United States, building up to 50 subs over three years.

    Wellington Chamber of Commerce chief executive Phil Lewin says losing Interlocks window and door fittings manufacturing overseas was not too surprising.

    "The problem is that what they produce is relatively bulky, facing high freight costs, and is not that difficult to knock off – easy to copy."

    Firms making "bigger, heavy stuff are all feeling the pinch", Mr Lewin says, but firms making smaller, high-value products – such as Vega Industries which makes lighthouse bulbs – are finding exciting niche export markets.

    Meanwhile, new apartments and offices in Wellington are making the city more attractive to creative "knowledge workers", Mr Lewin says. The IT and hi-tech sectors should be well placed to ride out any economic downturn if it does come.

    The Institute of Economic Research predicted this week that the national economy would grow by a bustling 4.3 per cent in the year to March 2005, boosted by more business investment, slowing only slightly the following year.

    Mr Lewin says anyone trying to get a builder or plumber recently will say the building sector is doing well, despite rising interest rates.

    The people filling the new flats are generally from hi-tech and IT firms. "People have the money to spend."

    Though businesses would not like another two rises in interest rates in the next couple of months, they could probably expect a reversal next year.

    National Bank chief economist John McDermott says business leaders cannot believe it, but the strong run is likely to continue – though with a brief dip next year. "It is non-specific grumpiness" not related directly to rising interest rates or any other single factor.

    National Bank's business confidence survey out this week showed businesses predicting that things would get worse in the year ahead – but businesses have been gloomy for a couple of years during the economic boom.

    "Perhaps above all we are just not used to success," Dr McDermott says. Businesses may simply be expecting the expansion to end soon.

    "The good news is that business cycles don't die of old age and the good times can continue."

    The price of oil remains a big spanner in the works – spiking to almost $US50 a barrel last month. If prices stay up they could knock world economic growth considerably and hurt New Zealand too.

    Thankfully, oil prices have ebbed toward $US43 a barrel, but they are still a terrorist's final prayer away from $US50 or even $US80 a barrel.

    Migration is also a loose screw.

    Latest figures show a net annual gain of about 20,000 migrants, but that is expected to be down to about 10,000 a year and could even go into reverse next year, according to some – potentially knocking back house prices.

    And in coming months many people on low fixed-rate mortgages will face much higher rates as the terms expire. In other words, the impact of the higher interest rates on the housing market has been delayed. Building consents have been slowing gently since March, suggesting house building has levelled off and may fall next year.

    But there are plenty of other projects taking up the slack – and certainly nothing looks like an economic roadblock yet.
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx