Economic outlook deteriorates, kiwi weighs on recovery: NZIER

Tuesday 23rd June 2009

Economists have a gloomier outlook for the New Zealand economy this year, as a stubbornly high kiwi dollar weighs on the prospect of an export-driven recovery next year.

The economy will shrink 1.6% in the year ending March 31 2010, according to a survey of economists by the New Zealand Institute of Economic Research. That’s worse than the 0.6% contraction predicted in March. Growth will resume at a 2.8% pace in 2010, brisker than the 2.7% rate estimated three months ago.

The trade-weighted index of the New Zealand dollar may average 57.8 this year, having been at 59.76 earlier today. Still, economists are divided over whether it will rise or fall over the next two years.

The jobless rate may reach 7.2% by March, the highest since 1999, and remain at about that level through 2010.

“Recent increases in the exchange rate may derail consensus forecast of an export led recovery,” NZIER economist Claire Gall said in her report. “Despite hints of stablisation, consensus forecasts suggest around 60,000 job losses over the next year and subdued wage inflation over the next two years.”

A stronger kiwi dollar erodes the value of overseas sales, crimping returns from the dairy, meat, wool and logs shipments that dominate New Zealand’s exports.

This month, both Bollard and Prime Minister John Key reiterated the need for a lower New Zealand dollar to stoke demand for kiwi exports and provide a boost to the economy.

“If the exchange rate was to rise too rapidly, that would run the risk of derailing the recovery process,” Key told a media conference in Wellington yesterday.

The currency recently traded at 62.65 US cents, down from 63.55 cents yesterday and has gained as much as 34% from its sub-50 US cents low in March. The TWI fell from 60.30 yesterday.

Forecasts from participants in the NZIER survey for the TWI ranged from a declined of 16% to a gain of 4%.

The Reserve Bank may be done cutting rates this cycle after it predicted a more moderate track for inflation and said the worst recession in 30 years may be abating. The central bank held the official cash rate at a record-low 2.5% amid signs of a pick-up in consumer spending, net immigration and the housing market.

The participants of the NZIER report, ANZ National Bank, Bank of New Zealand, ASB Bank, the NZIER, the central bank, UBS and the Treasury, predict inflation will slow to 1.6% this year, within Bollard’s target of 1% to 3%, and higher than the Reserve Bank’s forecast 1.2% in 2009.

Bollard this month reiterated interest rates would remain low until late next year, and could move “modestly lower” in the coming quarter. He embarked on the steepest series of cuts to the OCR in July, slashing 575 basis points from the benchmark rate to revive an economy that fell into recession last year.

The survey predicts interest rates will remain low, with 90 day bank bills at an average 2.6% this year, rising to a 3.3% average next year, and yields on 10-year government bonds will be average 5.4% in 2009 and increase to 5.8% in 2010. The 90-day bills recently traded at 2.86% from 2.84% yesterday, and the yield on the ten-year note fell 5 basis points to 6.04%.

Businesswire.co.nz

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