NZ Treasury flags heightened risk from European debt crisis

By Paul McBeth

Feb. 7 (BusinessDesk) – The Treasury says the European debt crisis has heightened risks to New Zealand and its trading partners, though the situation isn’t as bad as the worst-case scenario painted in its pre-election fiscal and economic update (PREFU) last October.

The government department expects volatile financial markets in the coming year and alternating bouts of investor optimism and pessimism, which will leave economic forecasts “subject to large changes within short periods of time.” The Treasury will update its forecasts in next week’s Budget Policy Statement.

“We are not yet near the downside scenario in the PREFU for our trading partners or for New Zealand, but the risk of something as bad as it occurring has risen since October,” the Treasury said.

In its briefing to incoming Finance Minister Bill English released last week, the department cut its forecast growth for 2013 gross domestic product about 50 basis points to 3 percent. The downside scenario in its PREFU would see GDP expand 2.5 percent in the same year.

The Treasury said global events have had a modest impact on New Zealand so far, with commodity prices down 9 percent from a peak in May and further falls likely.

Local banks will find international funding more difficult and expensive to come by, and if current pressures intensify or continue, the Treasury would expect bank lending to be affected later this year.

Reserve Bank Governor Alan Bollard has been warning about increased bank funding costs since December, when he flagged that would lead to a rise in retail interest rates independent of monetary policy.

The domestic economy is a little weaker than forecast in the PREFU because of the escalation of Europe’s sovereign debt crisis, though it’s still recovering at a subdued pace. It expects December GDP growth of 0.6 percent.

The Treasury said the Rugby World Cup had a limited impact on activity, but the latest analysis hasn’t caught the final games in the competition.

(BusinessDesk)

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