GDP and Inflation

Sluggish growth forecast to continue

Wednesday June 13, 2012 Dr Ganesh Nana

In releasing its latest quarterly assessment of prospects for the New Zealand economy, independent forecasters BERL paint a dismal picture for the immediate future.

 

“The economy is shackled by pervasive uncertainty, a banking sector consolidating its balance sheet, a decimated financial sector, a household sector also deleveraging, an accelerating migration exodus, and faltering markets in Australia and China,” noted BERL Chief Economist Dr Ganesh Nana.  While not chillingly cold, the sales climate is definitely on the cool side.

 

“And the employment picture has turned bleak as construction capacity heads west, the public sector (frontline and back office) sheds labour and businesses continue to replace full-time staff with part-time workers,” commented Dr Nana.

The warmer spots for activity are clearly found in sectors and businesses associated with Australian and Asian markets. However, the primary impetus to growth over the forecast horizon remains the Christchurch rebuild. The uncertainty as to its timing adds further downside risks.

 

Our forecast sees overall growth at just under a sluggish 2% per annum over the coming quarters, before surging to 3.5% per annum in the latter half of next year.  We see little likelihood of a return of the government budget to a surplus in 2014/15. An unknown in our picture, is the response when this possibility becomes real. Further and more stringent public sector spending (and employment) reductions seriously risk tipping a vulnerable economy into a double-dip recession. A more pragmatic response, using the cloak of global instability as a facade, would see the surplus target pushed out a year (or more).

 

The fragility of the current international, as well as domestic, economy will see the Reserve Bank of New Zealand cut the Official Cash Rate this month, with a further cut next month. These moves are made easier by the Australian decision this month to reduce their policy rate by 25 basis points. The RBNZ should be comfortable in making these decisions as the inflation outlook remains modest against the backdrop of constrained domestic demand.

 

FORECAST DATA SUMMARY TABLE – BIRDS EYE VIEW – JUNE 2012

 

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