NZ economy doesn’t have migration, Australia buffers in global downturn, NZIER says

By Paul McBeth

Aug. 31 (BusinessDesk) – The local economy was sheltered from the global financial crisis three years ago by Australia’s strength and a flood of new migrants, but that has disappeared and the recovery will be a slow one, according to the New Zealand Institute of Economic Research.

The economic think-tank says the Reserve Bank has to pay more attention to the global downturn than previously, and should keep interest rates low until at least the middle of next year, in its latest quarterly predictions. Still, it can put of its decision due to the number of households on floating and short-term mortgage rates, giving it more bang for its buck when it does go.

With the global economy looking at another decline, New Zealand’s own recovery will be slower as the high exchange rate and weak trading partners keep a lid on export volumes.

“The Reserve Bank has more time to assess what’s happening in the global economy, and the economy will respond much more quickly” when it does hike, principal economist Shamubeel Eaqub told a briefing in Wellington. “They want to raise interest rates, but this is not the time.”

The NZIER expects economic growth of just 1.4% this calendar year, and 2.6% in 2012 as households keep repaying debt and refrain from spending too much. That’s softer than the Reserve Bank’s June forecasts for the same period, which were picking growth of 2.8% and 4.7% respectively. The Treasury was picking 4.7% growth for the 12 months through March 2012 and 6.4% expansion the following year in its budget forecasts.

Local data has been more upbeat in recent months, and until the downgrade of the U.S. credit rating by Standard & Poor’s earlier this month, central bank Governor Alan Bollard had been flagging the removal of the 50 point cut he made in response to the Feb. 22 Canterbury earthquake.

The global downturn is of particular concern to the NZIER, as it could hit national exports which have led New Zealand’s recovery on the back of record high commodity prices. The annual trade balance was a surplus of $1.31 billion in the year through July, according to government data.

Still, Eaqub was more upbeat about the structure of the recovery, which isn’t being driven by increased lending. Even if it means a slower recovery over the next few years, it will be “much more sustainable,” he said.

The NZIER said the impact of the Canterbury earthquake hasn’t hit reported economic activity much, though other indicators suggest there have been some 26,000 private sector job losses and 2,000 people have left the area.

That comes a day after the government said it faces a bigger bill of $7.1 billion over the Canterbury quakes, extending this year’s budget deficit to $18 billion and wiping out the Earthquake Commission’s $6 billion Natural Disaster Fund.

(BusinessDesk)

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