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Exploit Opportunity To ‘Give Growth A Chance’

“Next Government Must Exploit Opportunity To ‘Give Growth A Chance’ ”, Say BERL Forecasters

Installing a growth-friendly inflation target and policy environment must be the priority for any new government.

“Three consecutive years of solid employment growth, the stimulus from robust (though now slowing) migration inflows, a competitive (though now less so) exchange rate, sound government accounts, regional development initiatives, benign (with maybe a risk of rising) inflation and a return to global growth all combine to provide policy-makers with a window of opportunity to ‘give growth a chance’,” according to the latest assessment of NZ’s economic prospects from independent forecasters BERL. The need to appoint a new RB Governor and the traditional post-election honeymoon period may well enhance the opportunity to install a growth-friendly inflation target and policy environment.

Noting that interest rate hikes of another 125-points over the coming 6 to 9 months - as signalled in last month’s Monetary Policy Statement - “... would represent an extremely severe monetary tightening over a relatively short period of time”, BERL suggest it would be foolish indeed to miss such a window of opportunity. The BERL economists were particularly concerned about the impact on investment and business confidence of the monetary authority’s focus on keeping activity within ‘capacity-constraints’. As BERL Forecasts Editor, Ganesh Nana explained,

“If the key objectives of economic management are to achieve economic growth, increased per-capita income and so standards of living, then investment to increase capacity and improve productivity needs to be whole-heartedly encouraged. The management of monetary policy, however, is targeted at reducing the possibility of significant periods of 'above-capacity' levels of activity. This approach removes one of the main stimuli to investing in capacity expansion and productivity improvements, that is the prospect of sustained buoyant profitability growth”.

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BERL forecasts interest rates to peak in mid-2003 with the cash rate at 6.25%. But noting the monetary view that GDP growth above 3% pa would be inflationary, BERL expects overall GDP growth close to its perceived maximum of 3% pa through the forecast horizon. The contribution from the domestic sector - consumption and investment spending - is predominant. Stronger export growth re-emerges towards the latter-half of calendar 2003, as current short-term exchange rate pressures subside - with the US$ stabilising near 118 Yen and the Euro near 94 US cents - leading to the Kiwi staying below 50 US cents over the medium-to-longer term.


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