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“Robust growth set to continue”, says BERL

Business and Economic Research Limited BERL FORECASTS Volume XLVII Number 3 September 2004 : Summary picture

“Robust growth set to continue”, say BERL forecasters

The September 2004 issue of BERL Forecasts stresses the strength of the New Zealand economy. This is at considerable variance with many other forecasters who see growth dropping noticeably in the near term.

“The two key areas are in the outlook for non-housing investment spending and the outlook for employment growth” according to BERL Director Kel Sanderson. “With a long list of ‘build as buildable’ infrastructure and other investment projects ready and waiting to be built the construction industry will remain fully occupied over the forecast horizon - and beyond.”

“The combination of investment spending and employment growth adding to capacity and further improving productivity growth, there are few reasons why the NZ economy can not continue to grow in a non-inflationary manner at rates in the vicinity of 4%pa throughout the next few years”, added BERL Forecasts editor Dr Ganesh Nana. “And it needs to be pointed out that this is not a one-day wonder, as the surge in non-housing investment spending has been maintained now for five years.”

Summary picture from September 2004 BERL Forecasts

* Annual growth in the current year to March 2005 is set to average over 4%. While we agree with the consensus view that growth will slow, that is about where our agreement ceases.

* BERL forecasts for GDP growth for the New Zealand economy are 4.1%, 3.7% and 4.3% for the March 2005, 2006 and 2007 years respectively. Our assessment finds several industry-specific factors, as well as a set of critical economy-wide influences, that combine to continue to underpin the robust growth phase NZ is enjoying.

* There are two key areas where we differ substantially and significantly from the consensus view. One is in a positive outlook for investment spending and its impact on the building and construction sectors. The other is in the labour market, where we see employment growth holding up.

* In terms of the construction industry a slowing in house building activity provides no threat. A long-list of non-residential “build as buildable” projects sit ready and waiting for capacity to become available. As construction capacity becomes available the next cab will come off the rank and keep the building industry well and truly occupied.

* In the labour market, employment and income growth remains positive and net migration inflow is also forecast to remain positive. The inevitable slowing in the real estate market will be balanced by continued spending and activity growth in other areas, namely - tourism, leisure and recreation, retail trade and business services. As a result we see a employment growth close to the 3%pa rate over the forecast horizon.

* The recent track record for non-housing investment spending is impressive. Real annual growth rates of 11.6%, 9.8%, 3.1%, 7.9% and 15.1% have been racked up in the past five consecutive March years. It is difficult to concur with the RBNZ that this expansion will immediately cease (ie. 0% growth), as is forecast in their September Monetary Policy Statement. Even with interest rate rises, the infrastructure and development projects (both public and private) already committed or at advanced stages on the drawing board underpin a busy time ahead for the construction industry.

* In the early 1990s, the total of public infrastructure and private non-residential investment was around 12% of GDP. It is now close to 20% of GDP. With one-fifth of our total annual production of goods and services being applied to expanding our capacity and productivity in coming years, we can clearly contemplate increasing incomes and wages generated by the productivity increase and therefore creating no, or very little, risk of inflation.

* A risk to this outlook arises from unduly pessimistic business confidence. This could derail investment expansion. But business confidence measures have remained negative for a lengthy period and seemingly indicate a limited relationship to business investment plans. In contrast, own-activity outlook indicators continue to remain positive.

* Uncertainties that surround the strength of global growth are now complicated by the unclear outlook for oil supply and price. This poses a further risk to our forecast outlook. * The current account balance steadies near a deficit of approximately 5% of GDP. The performance of machinery and equipment exports shines, with dairy and meat exporters also contributing to solid export expansion.

* Productivity improvements keep inflation in check, although it remains probably too close to the top of the 1%pa-3%pa range for the Reserve Bank’s liking. A further rise in the Official Cash Rate to 6.5% is likely this year and we would not be surprised to see it rise even further to 6.75% thereafter. With the growing differential with Australian short-term rates we expect the NZ$ to strengthen even further against the A$.

* Longer-term prospects for the NZ$ against the US$ are on hold until after the US election when underlying US-Euro-Yen issues can be addressed.

* Given this growth forecast, the government’s fiscal accounts can not help but be a picture of health. Although some of the growing surpluses are needed to fund committed and future infrastructure projects, the prospect of ever-larger surpluses will only continue to fuel the tax-cut debate. This debate will no doubt intensify as NZ itself enters an election year. Our contribution to this debate must await a future issue.

We are, however, compelled to wonder aloud why an inherently simple and efficient GST reduction has been consistently overlooked, if the need to ‘target’ tax cuts towards lower-income households is the desired objective?


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