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Economy set to do better, despite tremors

Tuesday 5th July 2011

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The nation's economic recovery was interrupted by the devastating February aftershock in Christchurch, which killed 181 people, but Treasury economists say that the economy probably still grew by 0.3 percent, and will do better in the rest of the year.

The Treasury said in its monthly commentary that though nationwide business and consumer confidence levels dropped, the aftershock's negative impacts on construction, communication, tourism and transport industries were largely confined to the quake-hit region.

Buisness activity in Christchurch was severely disrupted, and tourism flows through Christchurch and the South Island "substantially reduced".

"We think these negative impacts will be largely confined to Canterbury," the Treasury said. Overall, we think the economy likely grew by 0.3 percent in the quarter."

Financial costs of the earthquakes were reflected directly in the external accounts through inflows of cash from non-resident re-insurers, who were now estimated to be facing claims totalling $11.2 billion for the September earthquake and the February aftershock.

Because these claims are treated as "offshore assets" until settled, they have temporarily lowered New Zealand’s net international liability position to around 75 percent of GDP, from 86 percent in March 2010.

The nation's trade surplus with the rest of the world was now close to a 20-year high and being supported by high commodity export prices and volumes.

Moderate household spending growth was providing a further boost to the trade surplus by holding down imports of consumer goods.

Early indications for the June quarter were that lower interest rates and income gains from the rising terms of trade are beginning to provide meaningful support to the level of activity.

"There are encouraging signs in the housing market and retail spending has likely continued to grow modestly, restrained by weak household credit demand," Treasury economists said. Export prices had further increased, contributing to record export receipts in April, and prices of imported commodities, including oil, had eased.

Current levels of business optimism were consistent with accelerating growth over the year ahead, but "whether that is realised or not will be influenced by the way the global recovery story develops and how events in Greece unfold".

About 10 percent of New Zealand's exports are traded in euros and a further deterioration in the Greek debt crisis could affect trade or financial channels.

Meanwhile, Reuters reported that a poll of 14 economists expected the economy to have risen 0.4 percent in the March quarter, after escaping a recession in the December quarter with 0.2 percent growth.

Last week, a stream of data including a sentiment survey, building work, and inflation expectations survey was seen pointing to an improving environment.

The Reserve Bank of New Zealand slashed its rate by 50 basis points to a record low 2.5 percent in March to bolster confidence and the economy after the earthquake.

The poll had a majority view that rates would not be changed until the first quarter of next year.


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