Economic Overview March 2001

Economic Overview March 2001

Dancing to our own economic tune, but for how long?

The economic outlook for New Zealand is positive for the next year or so, in contrast to the woes of Australia, the United States and Japan, according to WestpacTrust’s March quarter Economic Overview.

The economy is expected to grow by about 3% this year. However, the decline in trading partner growth will eventually impact on New Zealand and necessitate lower interest rates as the year progresses.

The Official Cash Rate is likely to reach dropfall around 5.5%, from 6.25% currently to 5.5% over, during the next six months.

“Strong export revenue has largely been responsible for the recent rise in domestic confidence and spending. For the next six months or more, the low NZ dollar exchange rate, and good export volumes and tourism numbers, will continue to be positive”, according to Adrian Orr, Chief Economist of WestpacTrust.

However, two key factors will constrain rapid growth in NZ - high domestic debt levels and a deteriorating global economic situation.

“This may be as good as it gets for external trade, with demand for our products set to come under pressure. The US economy has been the engine of world growth over recent years and has just stalled,” said Adrian Orr said.

WestpacTrust anticipates growth of less than 1% for the US economy this year, compared to growth of 4% to 5% during much of the 1990s. Australia, Japan and SE Asia are all greatly affected by this slowdown.

Meanwhile, growth in Europe appears to have peaked, with internal trade problems now on the rise following with the outbreak of foot and mouth disease.

Recent WestpacTrust research, based on both trade flows and business cycle interactions, indicates NZ growth will be impacted significantly by the US economic slowdown, but with a lag of about one year. The impact comes via less demand for New Zealand’s exports, as well as investment flows and other knock-on effects.

“The Australian, New Zealand, and United States business cycles are well correlated. Fortunately, the lag between NZ and the global slowdown, and our current domestic upswing, give policymakers time to move. It is likely that lower interest rates yet will be needed to bolster the economy against the approaching international fall out”, said Paul Conway, senior economist at WestpacTrust.

“The Reserve Bank must accept that inflation pressures will dissipate and continue to lower interest rates. Meanwhile, the Government must focus on preserving a sound fiscal position, creating room for the business sector to adjust to the external shock. Key wage and price setters in the economy must also remain aware of the risks ahead.

“New Zealand is clearly the place to be at present, enjoying its moment in the sun on the back of a low NZ dollar. However, this no basis for complacency. If the world slowdown is prolonged or more severe than currently anticipated, then NZ will struggle to maintain its pace.”

Ends

Note: Our research on the impact of US economic growth on New Zealand and Australia will be available on our website (www.westpactrust.co.nz) from Wednesday 28th of March.

WestpacTrust will also be releasing Tthe WestpacTrust McDermott Miller Consumer Confidence Index will be released 2pmtomorrow, 27 March 2001. The results will be available to the media tomorrow morning, but will be embargoed until 2pm.

Contact:

Adrian Orr Chief Economist WestpacTrust Ph: 470 8250 Mobile: 025 914 935 Email: adrian_orr@westpac.co.nz

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