Global economic risks worsening: Treasury

Monday 5th July 2010

The New Zealand economy continues to recover, albeit more slowly than forecast, but the big change since the May Budget is the slide in global economic sentiment, says the Treasury in its June monthly economic indicators, released today.

"Downside risks have increased significantly and near term growth may be a little weaker than forecast," the Treasury says.

However, a strong exchange rate may damp inflation, which now looks less likely to peak at 5.9% after the October 1 GST rise, although a spike above 5% is still assured.

The government's relatively strong accounts have also seen interest rates on 10 year government bonds slide from 5.9% in early May to around 5.5% in June, notwithstanding growing signs of a resurgence of financial market indigestion flowing from the global financial crisis, and growing sovereign risk among heavily indebted European nations.

"New Zealand is not seen as a high risk sovereign borrower," the Treasury says, but the country's exposure to very high levels of private debt remains a potential source of concern.

In a special article on the implications of European fiscal austerity measures on New Zealand, the Treasury says there are growing fears that governments "faced with the difficulties of sustained austerity programmes and perhaps renewed banking sector stresses, might eventually prefer to default on debt."

That, in turn, could trigger "a more serious global funding crisis."

"From New Zealand's perspective, heavily dependent on continued access to international funding markets, the risk of harm from a significant re-intensification of global fianncial stesses would be much greater than that from a concerted European fiscal consolidation programme in isolation."

Businesswire.co.nz

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