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ASB Bank Economic Forecasts - Key Points

ASB Bank Economic Forecasts

key points

1. The lack of economic growth during the March quarter came as a surprise. However we are confident that the June quarter (and subsequent quarters) will show an improvement for the following reasons:
* Dairy and tourism will continue to underpin growth. The flow-on effects of higher rural incomes have only started to feed through the rural sector, and have still to impact on the economy.
* Low interest rates should support an improvement in retail sales.
* The construction sector should start to make a positive contribution to GDP.

The global economy continues to pose a risk for domestic growth, and so does confidence, which remains fragile. Looking further ahead, the global risk is reducing. The US and Australian economies have shown signs of turning the corner. Most major countries are expected to record an improvement next year.

2. Given the lacklustre performance of the domestic economy as well as the risks associated with the global slowdown, we believe that the easing in monetary conditions this year was appropriate. However, further cuts in the OCR are no longer considered necessary. The Reserve Bank is expected to start raising the OCR early next year as it seeks to unwind current stimulatory conditions.

3. The Reserve Bank faces several challenges in its bid to keep inflation within its 0-3% target. The migrant outflow poses a risk for inflation from several fronts - both through its impact on skill shortages and wages growth; and also through its downward influence on NZ's sustainable, non-inflationary economic growth rate.

4. The NZ dollar's performance has been disappointing. Although Australian dollar weakness has been the source of most of the downward pressure on the NZ dollar during recent years, some of it is also attributable to domestic factors. NZ's country risk premium has risen steadily since the last election, impacting on the currency and our long term interest rates.

However, fundamentals remain strongly in the NZ dollar's favour. We expect the NZ dollar to appreciate against the US dollar during the next few years, albeit to a modest extent. However the crossrate against the Australian dollar is likely to weaken slightly.


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