Chief Economist Tony Alexander's Quarterly Economic Forecast (BNZ)

Recent data releases show the New Zealand economy is in much better health than most people were thinking a year ago when surveys were showing very high levels of pessimism. Retail spending growth has accelerated, house prices are still rising, house sales are strong, and businesses are increasing their capital expenditure.

While the attention of most people will be on the housing market the growth in business spending is the most important thing happening in the economy at the moment. Businesses appear to have recognised that problems with getting skilled and unskilled labour in recent years are not going to go away. Expansion of output is now being sought increasingly through investment in more efficient buildings and more efficient plant and machinery.

In addition many businesses are investing in order to boost productivity and improve margins at a time when costs are rising for so many inputs such as labour, compliance, fuel and so on.

In addition the absence of very low interest rates two or three years from now means the cyclical decline in the New Zealand dollar will be limited. That means no export boom is in prospect either.

For those planning on boosting capital spending the recent rise in the Kiwi dollar is a positive development because most plant and machinery installed in New Zealand is imported. But the downside of the high currency is continued pain for many exporters which is likely to last through this year and into 2008 with the Reserve Bank fighting inflation caused partly by resource shortages and unlikely to cut interest rates until some time next year.