Global slowdown may not hurt NZ economy as much as feared - BNZ

By NZPA

Friday 4th October 2002

The lacklustre performance of global economies and New Zealand's bruised terms of trade might not slow economic growth as much as the Reserve Bank predicts, the Bank of New Zealand said today.

Stephen Toplis, the bank's head of market economics, said the worldwide slump had not bruised New Zealand's growth over the last 18 months, and the Reserve Bank could not rely on it to keep inflation in check.

"The reason for expecting a slowdown are not so much about global growth, but about the terms of trade," he said in the bank's latest Economic Monitor newsletter.

And despite all the bad press, "the terms of trade story needn't end on a sour note".

There were signs that export prices had bottomed and the Reserve Bank's predicted 5.0 percent decline in the year to June 2003 was too pessimistic, he said.

Prices in the dairy sector were moving off basement levels, while meat and forestry were holding up well.

The worsening in New Zealand's previously favourable terms of trade in the first half of this year would cut economic growth to 2.4 percent in the 2003 calendar year, he predicted.

Mr Toplis estimated last year's "peculiarly high world prices for New Zealand's basket of exports" had been worth 2.0 percent to nominal GDP.

A strong June quarter lifted New Zealand's annual growth in gross domestic product to 3.5 percent, at the top end the Reserve Bank's sustainable growth ban d.

New Reserve Bank Governor Alan Bollard's response this week was to leave the Official Cash Rate (OCR) unchanged at 5.75 perc ent, saying the slower than expected recovery of international economies would dampen New Zealand's growth.

Mr Toplis questioned whether it was "wise to simply rely on lacklustre international growth to provide a handbrake to local growth".

The consensus view was for strengthening global economies for the next two years, despite the negative sentiment.

"If the NZ economy was to persist along its strong upward path, the bank would have a big problem on its hands -- one that would demand a higher cash rate by no small amount."

"Will world growth, coupled with terms of trade, really pull the NZ economy back to trend?"

The outlook was uncertain but growth could well stay strong, he said.

Meanwhile, Macquarie Research Economics warned against complacency about the ability of the Australian economy to continue to defy global fluctuations.

"Resilience" had become a platitude among commentators but the economy was now more vulnerable to global weakness than it had been for some time.

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