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"Solid Growth Replaces Confidence Jitters"

"Solid Growth Replaces Confidence Jitters" According To BERL

According to independent economic forecasters BERL, the period of export-led expansion is set to continue this year, in stark contrast to the confidence jitters experienced last year.

"The forthcoming year sees the prospect of continued expansion in economic activity, mirrored through robust growth in commodity, merchandise exports and tourist arrivals, rising employment and falling unemployment numbers, despite last year's 'confidence crisis' ", commented BERL Forecasts Editor Dr Ganesh Nana.

In releasing their latest quarterly forecasts for the NZ economy, BERL are guardedly optimistic, although negatives remain on the domestic scene - with the building industry in particular looking at another weak year. In addition, with declining unemployment and skill shortages fueling inflationary concerns, the Reserve Bank is likely to continue its cautious approach in setting interest rates. Despite the one-percentage-point reductions in US and Australian interest rates this year (with the likelihood of more to come), the most NZers can look forward to is a quarter-point, or at best a half-point, reduction through this year.

Clearly, the global situation is of concern to the NZ's outlook, but we expect the US economy to quickly return to growth with the help of interest rate cuts coupled with the prospect of large tax cuts. Also of concern is the quickly deteriorating picture in Australia, although the impact of relaxed monetary policy should ensure any downturn is only short-lived.

Furthermore, uncertainty in Japan is likely to see strength in the US$ continuing. "This supports our expectation that the Kiwi will remain below US45 cents over 2001 and help ensure solid export returns over the coming year", said Dr Nana.

Summary sheet (page 3) from March 2001 BERL Forecasts

March 2001
The NZ economy, despite the confidence 'jitters' of last year, is set to continue its period of moderate prosperity based on an export-led expansion. Overall, with the December 2000 and March 2001 quarters recording quarterly increases in activity of the order of 1% each, GDP for the March 2001 is set to average 2.8% above that of a year earlier.

We forecast employment growth at a solid but unspectacular rate of 35,000 jobs a year. This represents annual increases near the 1.8%pa mark leading to unemployment under 5% by June 2002 and close to 4.5% subsequently.

New Zealand short-term interest rates however will stay well above global rates as the continued growth combine with skill shortages, wage demands and low unemployment to see the monetary authorities remaining on inflation alert. We expect consumer price inflation to remain closer to the 2.5%pa rather than the 1.5%pa mark.

Despite the favourable differential between NZ and global interest rates, the NZ exchange rate will remain constrained near, but under, the US 45 cent level, until late-2001; before gradually appreciating towards US 50 cents over the remainder of the 3-year forecast horizon.

Weighing on the Kiwi in the medium term is a continued current account imbalance, a weak Australian growth outlook, near-term growth uncertainty for NZ, subdued NZ corporate profitability and the US's stated 'strong-dollar' policy. We expect further US interest rate cuts this year are matched by others. These moves see global growth, although slowing, continuing throughout calendar 2001. Given this scenario we see little evidence to suggest the Greenback will be heavily (if at all) sold down and hence find little to support the notion that the Kiwi will dramatically appreciate this year.

The current account deficit is expected to improve significantly over calendar 2001 as the goods balance recovers markedly from its recent depths. The services balance improves dramatically as tourist operators revel in expanding visitor numbers. Overall, the deficit remains steady over the medium term at around $4.5bn, or 3.5% to 4% of GDP, as the net investment income deficit continues to dominate.

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