Trading partners, earthquake and tax cuts keep growth uncertain

Monday 4th October 2010

New Zealand's economic outlook will remain uncertain through the second half of the financial year, with the country's trading partners, the Canterbury earthquake and a re-jigged tax system adding to the uncertainty, the Treasury says.

The government's personal tax cut package and increase to GST, along with the total cost of the 7.1 magnitude Canterbury earthquake make it difficult to forecast the impact on economic growth after a more subdued first half than expected, the Treasury said in its September monthly indicator.

The strength of New Zealand's trading partners will be the key to growth in the second half, though a slowdown offshore wouldn't necessarily translate to New Zealand, the department said.

"Domestic factors can have more of an impact and cause New Zealand to be out of sync with our trading partners," the Treasury said.

"The economy has been more subdued than expected in the budget forecasts in the first half of 2010, but it is uncertain whether growth in the second half of 2010 will be stronger than the average quarterly growth of 0.7%."

The Reserve Bank pared back its economic growth forecasts by up to a percentage point over the coming couple of years as the rebound in the nation's fortunes was sapped by weak consumer demand.

Governor Alan Bollard stepped on the brakes last month, keeping the official cash rate at 3% amid signs the economy needs more stimulation to get itself up and running after its worst recession in about 18 years.

The Treasury surveyed 35 businesses last month, and found companies are still downbeat about their outlook for their recovery.

"The increase in profit was not as great as was hoped for" and expectations for 2011 are that they will be at "a similar level to that of 2010," the department said. "Business activity was general described as ‘flat'."

That comes ahead of tomorrow's quarterly survey of business opinion from the New Zealand Institute of Economic Research, which is expected to show firms are pessimistic about the economy's recovery, though less so of their own activity.

Businesswire.co.nz

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