NZ economy doesn't need fiscal stimulus yet, PM Key says

Monday 6th July 2015

New Zealand's economy is still fairly robust and doesn't need increased government spending to give it a kickstart, Prime Minister John Key says.

The government is ready to provide support to the economy if it starts showing signs of slowing, but Key doesn't think it's there yet, he said at his weekly post-Cabinet press conference in Wellington. ANZ Bank New Zealand economists today said local and central government balance sheets are strong enough to absorb a downward shift in the economic cycle, and recommended fiscal policy move to a neutral or expansionary mode to support the Reserve Bank's bias toward lower interest rates.

"I am not at all panicked about what I see in the economy at the moment, but I accept there are a few headwinds there that weren't so prevalent a little while ago," Key said. "I really urge people to take a deep breath - yes, dairy prices are down a little bit but there's a lot of other factors in our economy."

The Treasury's monthly economic indicator for June released today noted recent developments as highlighting the risks of weaker economic growth than was forecast in the May budget, which picks annual gross domestic product slowing to a 3.1 percent pace in the year ending March 31, 2016 from the 3.3 percent pace in 2015.

Slumping dairy prices and a deteriorating terms of trade prompted the Reserve Bank to cut interest rates last month, and pessimism in the agricultural sector and increased volatility in financial markets has stoked expectations governor Graeme Wheeler will reduce the official cash rate to 2.5 percent by the end of the year from its current 3.25 percent level.

Key said the government would be ready to stand behind the economy if necessary, which would probably come in the form of infrastructure spending as that provides immediate stimulus with long-term growth benefits.

The government's accounts for the 11 months ended May 31 are due for release tomorrow, and Key said they will reflect "quite a strong set of accounts."

In last month's monetary policy statement, the Reserve Bank said "ongoing fiscal consolidation continues to detract from domestic demand", having noted in its March report that spending constraints stripped out 1.7 percent from nominal GDP over the RBNZ's projection to May 2017.

BusinessDesk.co.nz

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