Recovering, but clear and present dangers

New Zealand Institute of Economic Research
Media release, 31 May 2010

Embargoed until 1am Tuesday, 1 June 2010

Recovering, but clear and present dangers for firms

NZIER (the New Zealand Institute of Economic Research) today released its June 2010 Quarterly Predictions – a comprehensive commentary on the New Zealand economy and forecasts covering the next five years.

“The New Zealand economy is recovering. But dangers are clear and present. The current global financial, political and social turmoil are the key risks. We believe there is no urgency for the RBNZ to raise interest rates in this environment. A gradual hiking programme from September would allow time to gauge the impact of the current risk flare, a preferable option to rushing rate increases that may have to be reversed,” NZIER’s Principal Economist Shamubeel Eaqub said.

The current global situation is the key risk to firms, households and the economy. The social unrest in Greece has shown how difficult real deleveraging can be. New Zealand will be negatively affected if global growth slows as a result of the European tensions. It will be more difficult to borrow and will cost more. Lower global growth would reduce demand for our exports.

The economy is more fragile than meets the eye. While confidence measures are very optimistic, household spending is still stagnant. The recent economic boost from migration is also fading, as emigration to Australia accelerates. Export performance is only now beginning to stage a broad based recovery – until recently much of the strength was concentrated in dairy and forestry.

The economy will stage only a subdued recovery. The consensus expects economic growth of 2.8% and 3.3% in 2010 and 2011 calendar years. We are less optimistic. We expect a more subdued recovery at 2.4% and 1.8%.

Our more cautious forecasts reflect the view that not all of the past interest rate cuts will be translated into economic growth. This is because credit growth, the main link between monetary policy and economic activity, is still very weak. From next year, interest rate increases will be accompanied by reduced government spending. Together, these will slow economic growth.

Consumer price inflation will spike to around 5% in early 2011 due mainly to a rise in GST, introduction of the ETS and increases in ACC levies. For many lower income households the tax cuts will be largely spent on living cost increases, which will be compounded by rising mortgage rates.

ENDS