The likelihood of a severe European debt meltdown has receded in recent months, and the foundations for continued economic recovery remain in place for New Zealand over 2012, according to the latest ASB Quarterly Economic Forecast.

ASB Chief Economist Nick Tuffley: “Europe has made better progress this year in dealing with its debt crisis, and we expect the region will continue with its ‘muddle through’ approach to keeping the crisis from becoming more severe. While prospects in Europe appear to have improved, it will be a long and gradual process for Europe to reduce its overall vulnerabilities, and further flare-ups are likely along the way. Here in New Zealand we expect that with the situation in Europe reasonably contained, we will continue on our slow path to recovery.”

Meanwhile, there is another risk now emerging at the petrol pumps, with oil prices back on the rise. However, Mr Tuffley remains optimistic the impact on New Zealand will be limited. “In New Zealand our oil usage is more efficient as we respond to a decade of high prices. There is also a silver lining because higher oil prices directly benefit New Zealand through the increased appetites of oil producing countries for our dairy and meat products.”

Mr Tuffley also notes the recent strength in New Zealand house prices. “Increased construction will progressively alleviate house price pressure over 2013 and 2014,” he says. “Canterbury has years of residential reconstruction ahead of it, and in Auckland rising prices and rents are giving a strong signal to build. Households are also lifting their spending and momentum will continue to increase modestly.”

Mr Tuffley predicts the OCR will peak at four percent, but the rise in interest rates will be gradual. “The high New Zealand Dollar is a continuing headache for the Reserve Bank, and with economic recovery remaining gradual, interest rates are likely to remain low for much if not all of this year.

“Household behaviour has changed considerably over the past few years, particularly regarding debt, in a way that will make the Reserve Bank’s job easier over the next couple of years as it lifts the OCR from its crisis low.”