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NZ economy tipped for slow recovery in 2011 - ASB

Wednesday 2nd February 2011

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The economy is expected to continue its slow recovery this year, helped by strong commodity prices and low interest rates for much of 2011, ASB Bank said in its quarterly economic forecasts.

However, caution is likely to shape the domestic environment as businesses, government and households keep a close eye on spending, ASB chief economist Nick Tuffley said.

"New Zealand itself is starting along the path to a more balanced mix of growth, though the more challenging part will be improving our export performance on a more sustained - and broader - basis."

The economy is slowly recovering from the effects of the global financial crisis in 2008/09, and recession.

New Zealand's trading partners will experience average growth, with much of the momentum from Asia rather than the US, UK and Europe, which will continue to be weighed down by government debt and other domestic concerns.

In New Zealand, annual gross domestic product (GDP) growth is expected to remain subdued for much of the year, picking up from 1.5% for the December quarter to 2.7% by the end of the year and then around 3% for the next two years.

Consumers price inflation is tipped to spike at 5.3% in the middle of the year before settling to just over 3%, while unemployment will remain above 6% until the end of the year.

The current account deficit will start off as 3% of GDP before blowing out to more than 5% of GDP by the end of 2011.

"Looking ahead, the export sector will remain a key factor underpinning the economic recovery," Tuffley said.

Continued growth in China would support already strong commodity prices, and exporting manufacturers were expected to prosper.

The Rugby World Cup would also provide a boost to the key tourism industry this year.

House prices, which peaked in 2007 and then fell 11.5% before bottoming out in January 2009, have stagnated in the last year and the market remains soft. However, prices will increase slowly rather than reverse.

Mortgage rates are low but still higher than early 2009 when the market began to recover, he said.

"The fundamentals for housing remain unsupportive: migration is low and affordability is still stretched."

The Reserve Bank is likely to wait longer to make sure that economic recovery is on track before raising interest rates, expected to be at least June. ASB forecast a September rate rise in the official cash rate from the current 3%.

"Three key domestic developments that would give greater confidence of a self-sustaining recovery are: rising house sales and prices; recovery in business capital expenditure (over and above earthquake reconstruction); and recovery in borrowing demand - particularly by businesses," Tuffley said.



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