A chief economist of one bank summed up the state of the economy by saying it looked as though it "was in a sweet spot."

New Zealand's economy continues to surprise with its strength and the message from many business commentators was that Kiwis should start getting used to a buoyant economy. So much so that another economic outlook report said: "The New Zealand economy seems a little like the Energiser bunny – it just keeps on going, and going, and going." For the calendar 2004 year, GDP growth is projected to reach almost five percent - the fastest growth, if achieved, since the bounce out of the Asian crisis and drought induced recession of 1998.

Bankers and economists say we're not really used to this kind of success and sceptics are asking when the bubble will burst. Like all Energisers, the spark in the New Zealand economy is likely to run out and Westpac is predicting a growth slowdown will not become apparent until mid-2005. Other banks and analysts are simply saying: "Slowdown...what slowdown?"

On March 10, New Zealand's central bank raised interest rates to a record high and left the door open for more as inflationary pressures threatened to get out of control. The official cash rate went to 6.75 percent, the first move in four months, and the highest level since the rate was established in 1999.

The Reserve Bank said the economy was proving to be stronger than expected for longer, which was generating stronger underlying inflation. About the same time in March, the New Zealand dollar traded at a 22-year high to hit about US$0.7373 with predictions it could go higher.

The Kiwi's stellar rise is taking a toll on the economy's trade, and exporters.

Domestically, the New Zealand labour market has never been so strong or so tight and stories in our publications about the impact of trade or skills shortages bear that out. Plumbers said they were turning work away or restricting the amount of work they were taking on. In a New Zealand context, the tight labour market has the potential to put the brakes on the current economic expansion.

"Labour is one of the biggest constraints to firms' expansion," says a Westpac report.

Growth in consumer spending has continued apace, the housing market obtained a second wind which injected even more confidence into consumer spending in the first few months of 2005. A recent quarterly survey of business opinion showed an increasing number of businesses intend to invest in both plant and machinery and buildings over the coming year, while they also anticipated taking on more staff.

The key drivers of economic growth in recent years are now tending to show some signs of weakness; namely slower migration, weaker housing market, interest rate hikes and an overvalued currency.

Annual net migration has slowed from a peak inflow of 42,500 in February 2003 and the consensus view is that net migration will settle around a 10,000 to 12,000 inflow a year. However the predicted weakness in the housing market has not eventuated. Rising house prices beat increases in net debt to deliver a 14.8 percent increase in net household wealth, according to the Spicers Household Savings Indicators.

On average, net wealth per household rose by $28,000 in the past year with gains heavily biased towards owners of residential property, Spicers said.

In terms of monetary policy - higher interest rates and an overvalued currency - Westpac talks of "lags in the growth process." These lags prolong the current expansion. For the Reserve Bank, it means a little bit of patience is warranted – once the lags unfold, the slowing in growth they are trying to engineer will eventuate, Westpac predicts.

Westpac initially forecast it would be the first half of 2005 that the real extent of any slowdown will start to become evident in the GDP figures but now it says firm evidence of the growth slowdown would not become apparent until mid 2005.

Westpac expects GDP growth to slow to two percent in the 2005 calendar year and reach a trough of 1.7 percent in the year ended June 2006. This coincides closely with forecasts from the NZ Institute of Economic Research, which predicts GDP growth for 2005-06 to be lower than in the current year, easing to 2.3 percent. The figure reflects slower growth in domestic demand, driven by a 10.3 percent decline in house building.