Treasury pares current-account forecast

Tuesday 5th May 2009

The Treasury has pared back its pessimistic forecast on the country’s current account deficit as weak domestic demand and a fall-off in the currency narrow the gap.

The department expects the current account deficit narrowed to 8.6% of gross domestic product in the first three months of the year, from 8.9% in the fourth quarter, according to its monthly economic indicators report for April. That’s down from its previous forecast of 9.4% in December.

The Treasury expects a much-weaker economy in 2009 than previous forecast, predicting GDP would shrink around 1% in the first quarter due to lower consumer spending, business investment and exports.

“Incoming data over the past month have become ‘less bad’, suggesting the bottom of the cycle may be near,” the report said. “These signs of recovery are tentative and in the short-term the fall in world economic activity will lead to a further deterioration in bank balance sheets.”

New Zealand’s economy fell into its first recession in a decade last year, and GDP shrank 0.9% in the last quarter of 2008. Global GDP is estimated to have fallen by an annual rate of 6% in the fourth quarter, with a decline of almost as much in the first three months of this year, according to the IMF.

The Treasury department’s report estimates unemployment increased to over 5% in the first quarter as firms cut back on labour costs in the face of the recession. The Household Labour Force Survey out on Thursday is predicted to show the jobless rate rose to 5.3% from 4.7% last quarter.

The Treasury notes the fiscal stimulus in other countries has improved market sentiment that “another financial meltdown” could be avoided, and predicted New Zealand’s trading partner growth will return next year, but at 2% lower than what was considered a “normal rate”.

The outlook for the nation’s trading partners is below December’s forecast, and will probably lead to deterioration in New Zealand’s prospects, the report said.

The report is the last of the series before the budget announcement on May 28, where Minister of Finance Bill English will outline his plan to lift the country’s economy out of recession.

Businesswire.co.nz

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