Treasury keeps half-year forecasts intact, sees kiwi dollar strength into next year

Wednesday 13th February 2013

The Treasury reckons its December forecasts for economic growth are still intact as New Zealand continues its gradual recovery, though the headwind of a strong kiwi dollar is likely to endure into next year.

Secretary Gabriel Makhlouf told Parliament's finance and expenditure committee its forecast average annual growth of 2.5 percent in the coming five years is by and large intact, though the risks are still skewed to the downside, if not quite as extreme in the face of the US fiscal cliff debate and heightened uncertainty over Europe's ability to stave off a sovereign debt crisis.

"Since HYEFU (half-year economic and fiscal update), revised GDP data from mid-2012 indicates growth was weaker than we expected, but the run of recent data is pointing to a pick-up in December," Makhlouf told politicians. "Reports relating to Canterbury indicate the rebuild is gaining momentum and businesses seem more upbeat."

Mahklouf didn't have any good news for exporters on the currency, saying "the exchange rate is assumed to remain near its current level in the current year and into 2014 impacting on growth in the tradable sector."

While that's acting as a drag on exports, it is keeping inflation low and aiding capital investment, he said.

Mahklouf's testimony followed Finance Minister Bill English, who used his time to announce the budget will be on May 16.

English said the budget will include measures to encourage domestic and foreign investment, saying that will help stoke jobs and wage growth.

In 2009, the Finance Minister tried to loosen barriers for overseas investors, though the government later backed down and ended up tightening restrictions in the face of growing opposition to foreign buyers of large tracts of farmland.

Both English and Mahklouf today talked down their ability to make any sustainable impact on lowering the exchange, which is effectively a pawn in the currency wars between larger economies.

"There's some discussion about whether you can get some exchange rate effect that will relieve pressures on those exporters, but we haven't seen a viable sustainable proposition to do that," English said. "If you could just make that choice well of course you would if it was costless, but it's not costless."

The currency recently traded at 84.07 US cents and 75.90 on the trade-weighted index.

BusinessDesk.co.nz

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