Forecast 2002

By Frances Martin

Monday 1st April 2002

Madame Frances gazes into her crystal ball

If the Kiwi economy had a star sign, its horoscope for 2002 would read something like this: "The planets are aligned to bring you wealth aplenty, though the rising sun could melt it all away. Beware the dark stranger; the one who is Brash has his eyes fixed firmly on your wallet."

Yes, the good times are likely to keep rolling for New Zealand businesses this year, according to our crystal ball-gazing economists, as long as Japan's financial system doesn't collapse and Reserve Bank Governor Don Brash isn't too aggressive with interest rate rises.

For once, just about every economic indicator in New Zealand is looking healthy. Interest rates are near historic lows, the low dollar is buoying exports and confidence is growing. Inflation and unemployment are down, the current account is under control and migration data points to the end of the brain-drain. Even the property market is recovering.

Many economists expect things to stay in great shape, though like any good soothsayers they've spiced up their forecasts with a few scary warnings. The main one, of course, is that Japan's debt-laden banks will collapse, bringing down that country's financial system and possibly sparking another global slowdown. A collapse in the world's second-largest economy would have serious fall-out for New Zealand. But if Japan does hit the wall, at least the Kiwi economy is in the best shape it's been in for years.

The economy managed to grow about 3% last year, despite an international slowdown. And though there are signs growth is easing, trend-spotters like National Bank treasury economist Joselyn Stroombergen say we could get close to 3% this year. And that's despite expectations the Reserve Bank will start raising interest rates as early as May. It mightn't sound much, but it's above the average 2.5% we've clocked up in the last decade.

Currently the smart money is on the Reserve Bank's official cash rate - on which bank lending is based - creeping from 4.75% now to 6% by the year's end. But even that isn't expected to put too much of a brake on business activity. Kiwi firms certainly don't seem too worried about rates going up. The National Bank's latest confidence survey shows 39% of business respondents expect to do better this year, up from 28% in December and the long-time average of 30%. Another pointer to the good times ahead is that investment intentions have been climbing since the middle of last year, and 21% of firms now expect to invest more cash.

Even our old dog of a property sector is looking livelier. With vacancies falling and rental demand rising, valuations are picking up. Some of the long leases written in the 1980s are also ending - and new ones agreed upon. According to fund manager Armstrong Jones' chief investment officer David McClatchy, listed property investments returned a respectable 12% in 2001 and the scene is set for good growth this year.

Brokers are also rubbing their hands together over prospects for the local share market. Though prices aren't expected to rise as much as last year, there are good pickings around. In the last reporting round, many listed companies exceeded analysts' forecasts. Broker JB Were estimates that our market is now trading at 10% less than it's worth; it tips domestic stocks such as Waste Asset Management and INL to do well.

Crucially for an agricultural exporter like New Zealand, the prognosis for commodity prices and the dollar are also pretty good. Though dairy prices will probably keep slipping from recent highs, the outlook for beef, wool and timber is more optimistic, says ANZ economist John Bolsover. He believes the low Kiwi dollar will buffer New Zealand from sliding international prices -this year, at least.

Of course, not everyone expects the dollar to stay low. Some economists tip it to rise from $US0.42 now to as high as $US0.50 by the year's end, which would make our exporters considerably less competitive. Armstrong Jones' McClatchy is pretty cynical about such forecasts. For a few years now people have been predicting the dollar will rise above the low- to mid-$US0.40 area, he says, but every year it fails to do so. If ever there was a time when the dollar was going to hit $US0.50 it was last year, when commodity prices went through the roof, he says. It didn't do it then, so it's not likely to now.

What are the threats to this rosy economic picture?

Well, according to just about everyone wearing a suit and tie, the biggest risk is that a round of bank bankruptcies in Japan could trigger a severe economic slowdown in that country. Shockwaves from the collapse would pound its Asian neighbours, many of them important trading partners for New Zealand. Da-mage would also be done to the European and US economies. Japan, mired in its third recession in a decade, seems unable to get to grips with its problems (see "Opening the kimono"). Measures to halt deflation, put in place by Prime Minister Junichiro Koizumi, have failed to impress investors and economists, and have been criticised as containing few fresh policy ideas. Koizumi has indicated he'll take further action if it is needed, but so far there's been little improvement in Japan's position. Anyway, there's no guarantee he'll remain in office very long - Japan has had 11 prime ministers in as many years.

The gloom cast by Japan's troubles is annoying for Kiwi businesses, given that last year's US-inspired world slowdown seems to have ended. Amid burgeoning signs of recovery, US Treasury officials are now questioning if the downturn in the world's largest economy was actually a recession.

There's certainly growing confidence that the US economy is on the mend, with annualised gross domestic product hitting 1.4% in the fourth quarter. Growth could strengthen this year, with the effects of monetary policy easing - the US Federal Reserve cut interest rates 11 times in the past year to kick-start the economy - still to come.

Of course, Japan isn't the only threat to our economic oasis. We've managed to come up with a few homegrown ones. The biggest local danger is that the Reserve Bank will move too fast or too steeply in raising interest rates. Brash's already tricky job - likened to driving a speeding truck while looking out the back window - will be even harder this year, given the difficulty of predicting what will happen in Japan.

Another dark spot is the election and the uncertainty it casts around investment decisions. As in other years, the risk premium slapped on Kiwi investments is likely to rise three to six months out from polling day. Still, New Zealand's financial markets have weathered every other election, and this one is likely to be no different.

That's what the tea leaves say, anyway.

Frances Martin
frances.martin@paradise.net.nz

Comments from our readers

No comments yet