Sharechat Logo

Eurozone crisis outcome critical to growth outlook

Tuesday 25th October 2011

Text too small?

The volatile world economy is the greatest risk to New Zealand achieving the economic growth rates and return to fiscal surplus in 2015 contained in the Treasury’s Pre-Election Economic and Fiscal Update.

While Finance Minister Bill English said it was more likely that global leaders would manage their way through the current crises, the potential for a “meltdown” could not be discounted.

“There’s some risk of catastrophe,” he told a media briefing. “The Europeans may go completely off their nuts and do something completely stupid next week.”

However, he counted that a low risk, with reasonable growth prospects for a “resilient economy driven by sensible policies.”

“We’re taking the view that with the Christchurch rebuild, which has to happen, and a reasonable outlook for our export prices, we’ve got a reasonable chance of reasonable growth,” he said.

The PREFU says New Zealand’s sustainable rate of economic growth – that is, the rate above which inflation becomes problematic – remains relatively low at 2.5 percent a year and forecasts out to 2026 predict labour productivity will continue to increase at a slow 1.5 percent a year, in part driven by the impact of the aging population.

The Treasury forecasts include a gloomier scenario, based on the potential for sustained global economic turmoil, in which growth in the year to March 2012 is 1.7 percent, instead of the forecast 2.3 percent, and 2.5 percent in 2012/13, compared with 3.4 percent in the “central” scenario.

After that, the Treasury sees a stronger bounce-back, with stronger growth rates between 2014 and 2016 than under the central scenario, even though the total size of the economy remains smaller than it would have been by about $35 billion.

Under the more pessimistic scenario, the balance of payments deficit on current account blows out to 76.9 percent of gross domestic product in March 2016, compared with 6.9 percent of GDP in the central forecast.

Perhaps most worryingly, the Treasury also foresees a one in five chance of a much worse outcome.

“If a variety of factors conspired to result in the exchange rate not depreciating as we expect in the downside scenario, New Zealand would have less of a cushion from the weaker global economy,” the Treasury says.

As it is, the PREFU forecasts a substantial drop in the trade-weighted index for the New Zealand dollar over the forecast period through to 2016, from a forecast of 70.0 in March 2012 to 63.6, even as short-term interest rates rise over the same period so that the yield differential between 90 day and 10 year bonds is virtually flat at 5.3 and 5.4 percent respectively in 2016.

Under the more pessimistic scenario, “the cumulative loss of trading partner growth over five years is 13.5 percent of one year’s annual GDP.”

English said there was little the government could do to influence the global economy, so the government would concentrate on what it could control, such as export competitiveness.

On the fact that interest rates have barely risen since credit rating downgrades earlier in the month, English said the world economy was going through its “most unusual period since the Second World War”, with many of the world’s largest economies experiencing or being threatened with downgrades, accompanied by the lowest interest rates in 50 years.

“Those pressures are overwhelming upward pressures (on interest rates) from a downgrading of New Zealand, at least,” English said. “It’s a very confusing picture. All we know is there’s been no effect yet on mortgage rates.”

BusinessDesk.co.nz



  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comment:
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

Contact Energy Limited (NZX: CEN) Considers Green Capital Bond Offer
Tourism Holdings Limited (NZX: THL) Sells Mighway and SHAREaCAMPER to Camplify
26th October 2021 Morning Report
Harmoney Corp Limited (NZX: HMY) Prices $105m Inaugural ABS Transaction
New Zealand Rural Land Company Limited (NZX: NZL) Agreement to acquire large scale dairy asset portfolio
EROAD Limited (NZX: ERD) launches Clarity Solo Dashcam
22nd October 2021 Morning Report
Pictor ready to roll out game-changing COVID antibody test in New Zealand
Scott Technology Limited (NZX: SCT) Announces FY21 Results
21st October 2021 Morning Report