Westpac today released its latest Economic Overview, setting out forecasts for the New Zealand and global economies.

"We are now about halfway through the deterioration in export conditions that we first warned of in last July's Overview," commented Westpac Chief Economist Dominick Stephens. "Europe's recession is well-established. We are now concerned about the implications of a deepening slowdown in Asia. This is bad news for New Zealand, given Asia's importance for global food prices."

"But it is a dip, rather than a disaster, that we envisage," said Mr Stephens. "Asia's central banks will be quick to ride to the rescue now that global inflation is retreating and China's property bubble has burst. So long as Europe doesn't spark a full-scale financial meltdown, the global economy should be back in gradual recovery mode by the second half of the year."

Westpac expects global prices for New Zealand's key export products will drop as the Asian dip deepens, but could recover as Asia recovers later in the year. The exchange rate was expected to follow a similar trajectory.

Westpac noted that the adverse global environment, slow local economy, and the hasty retreat of inflation had delayed the likely start date of the Reserve Bank's OCR hiking cycle until the end of the year.

"We're seeing evidence that low interest rates are stimulating the housing market," said Mr Stephens. "If interest rates stay low house prices will keep rising throughout this year."

For 2013 and 2014 Westpac expects a prolonged period of rising interest rates, as inflation is stoked by stronger construction activity. "Repair and rebuild activity is already underway in Canterbury, and the pace will accelerate from here," noted Mr Stephens.