2002 growth expected to skim 4 pc, but hampered by capacity

By NZPA

Monday 7th October 2002

New Zealand's economy is expected to near utopian heights of 4 percent growth this year, before quickly losing ground in 2003.

Economists, however, are urging people not to confuse slower growth with low growth.

"Very few expect New Zealand's strong economic expansion, currently top of the pops in the OECD, to lose its way," said Craig Ebert, an economist with the Bank of New Zealand.

"It's more a case of finding its feet after a bit of a sprint."

Both the BNZ and WestpacTrust are predicting the country to hit a growth rate of 4 percent this year, thanks to a strong export performance in the first half of the year and solid domestic spending.

A "much less spectacular" growth rate of 2.5 percent is anticipated for the gross domestic product rate next year due to feeble world demand and commodity prices.

Mr Ebert said the current growth rate was unsustainable. "Spare resources are slowly but surely running thin."

In this regard, Thursday's quarterly survey of business opinion (QSBO) would provide some insight, especially its measure of capacity utilisation.

Also of note would what firms reported as being the major factor in constraining growth. The availability of labour had emerged as a real constraint to growth, a shortage unseen since the mid-70s.

WestpacTrust's chief economist Adrian Orr also felt business capacity was a key reason why overall economic growth had been so subdued despite exceptional agricultural conditions.

"New Zealand achieved stronger growth during the mid 1990s despite having a higher exchange rate, higher interest rates, and far from perfect agricultural growing conditions."

Mr Orr blamed structural factors for much lower investment levels, saying policy signals had been mixed, deterring businesses looking to make long-term investment decisions.

He said infrastructure investment was a matter of urgency, particularly in the Auckland region.

In the shorter term, data during the week would give a clearer insight into how strong the economy would remain, the analysts said.

Housing had another "six months of good growth" ahead of it, fuelled partly by migration, according to WestpacTrust.

And retail trade was also expected to remain strong. Based on upbeat reports, the BNZ expects Tuesday's August retail figures would remain steady at 0.5 percent.

Even if it was lower it was not necessarily something to worry about.

"Despite the prospect of lower farm incomes, there is plenty to suggest that households will keep their wallets wide open, including rising employment, strong net immigration flows, and relatively high consumer confidence."

The QSBO would also provide company feedback on trading conditions which should provide an early lead on GDP trends, Mr Ebert said.

"Softer results are likely to show for Q3 if only because the Q2 results were so strong. But it will be interesting to see if firms expect slower growth to persist in Q4."

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