New Zealand’s economic growth prospects can continue to be seen as either a glass half-full, or as a glass half-empty, according to BERL’s latest assessment.
While preferring the glass half-full scenario, BERL Chief Economist Dr Ganesh Nana stressed in a presentation today that it was becoming increasingly difficult to ignore the shadows cast by lurking deflationary influences. Deflation stalks the global economy and we will not be able to escape these influences.
“Critically, the anti-inflation bias in our policy framework of the past 25 years must be replaced by a clear understanding that the costs of deflation are just as vigorously to be avoided.” commented Dr Nana. “Our adjustment to lower commodity prices and sluggish world demand is continuing. Both the OCR and the exchange rate will have to come down further, and it is important that officials don’t get distracted from this path”.
“But the model of the past 25 years centred on monetary policy (i.e. interest rates) is now close to impotent in the face of the deflationary world. We can no longer rely on contracting-out economic policy to the central bank. However, the appetite for active fiscal policy to make a return to the policy toolkit remains unclear.”
The BERL forecasters note that while employment growth has remained positive, a slowing in growth is clear. And it is only a fortuitous drop in those trying to find work that has kept official unemployment rates below 6%. Job growth is forecast to continue, but without additional stimulus, this will be insufficient to match the increases in workforce numbers. BERL forecasts a combination of an acceleration in numbers retiring, and those disillusioned, as well as unemployment rate near 6.5% in a year’s time.
In conclusion, Dr Nana notes “the longer-term structural imbalances in the New Zealand economy, including a persistent external deficit and a struggling tradable sector remain. While GDP growth will continue, and this will present a better picture than other economies, the nature and composition of that growth will do little to rectify these imbalances. It remains to be seen if we are willing to recognise that a deflationary world will require a new toolkit.”