New Zealand will be the “rockstar” economy of 2014, with growth set to outpace most of its developed markets peers, according to HSBC, a stark contrast with neighboring Australia, which is struggling to maintain economic momentum.
“We think New Zealand will be the rockstar economy of 2014. Growth is going to pick up pretty solidly this year,” Paul Bloxham, chief economist for Australia and New Zealand at HSBC told CNBC Asia’s “Squawk Box” on Monday.
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HSBC forecasts the economy will grow 3.4 percent in 2014 – the fastest pace since 2007 and well above trend growth of 2.5 percent. For 2013, the economy is expected to post growth of 3.0 percent, according to the bank.
There are three key factors supporting faster expansion, said Bloxham.
The first is spending on construction, including the rebuilding of Canterbury region that was ravaged by an earthquake in February 2011. “There’s an enormous amount of construction that’s going into building that region of the economy,” he said.
Reconstruction spending is not expected to peak until 2017, and should continue to boost the economy for some time, Capital Economics wrote in a recent note.
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The second driver is the country’s housing boom that has been fueled by low interest rates and a wave of net immigration over the past year.
While the Reserve Bank of New Zealand (RBNZ) tightened rules around home loans in October and is likely to begin hiking rates in the coming months, economists expect residential investment will remain robust.
The final factor is rising dairy prices – driven by strong demand out of China – which is supporting rural incomes, noted Bloxham. New Zealand is the top dairy exporter accounting for around a third of the world’s trade in dairy products.
However, Daniel Martin, Asia economist at Capital Economics, who forecasts growth of 3.0 percent in 2014, notes there are a couple of factors could hold back growth this year.
“First, New Zealand’s two main export markets, Australia and China, are expected to slow. Second, and more importantly, the government is looking to return its budget to surplus by 2014/15,” Martin wrote.
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“As such, the strong government consumption growth in the third quarter [of 2013] is unlikely to be sustained,” he said.
Government spending growth rose to 2.2 percent on-quarter in the July to September period, from 0.1 percent in the second quarter, contributing to the economy’s pickup in the quarter.
Nevertheless, many investment strategists recommend betting on assets that are set to benefit from the country’s economic surge – in particular the New Zealand dollar, informally known as the kiwi.
Kathy Lien managing director of BK Asset Management, for instance, has identified the kiwi, as the “hottest” currency of 2014.
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“Of all the major currencies our favorite is the New Zealand dollar because in addition to talking about raising interest rates this year, the Reserve Bank also laid out a plan to bring rates from the record low of 2.5 percent to 4.75 percent by the first quarter of 2016,” Lien wrote in a note last week.
“No other major central bank is as hawkish as the RBNZ and with a high and growing yield, the New Zealand dollar should attract a significant amount of investment this year. What makes New Zealand dollar even more attractive is that demand will be supported by growth,” she added.
—By CNBC’s Ansuya Harjani; Follow her on Twitter: @Ansuya_H.