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Bollard says economic forecasting difficult, rugby a factor

Friday 28th January 2011

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The Rugby World Cup will add about $700 million to the New Zealand economy over the six weeks of the event, and if New Zealand wins it could boost general confidence, Reserve Bank Governor Alan Bollard says.

Speaking to the Canterbury Employers' Chamber of Commerce today, Bollard outlined a number of risks in both the domestic and international economy.

He said that businesses had changed significantly since the global financial crisis, making economic forecasting particularly difficult.

"We have little from history to guide us about how enduring or deep these changes may be. In addition, the recovery has been rocky and fragile," he said.

But the central banker was prepared to forecast the result of the rugby tournament the bank expects to contribute about a third of a percent to gross domestic product.

"How likely is it that New Zealand will win? We have asked our expert team of forecasters to answer this question.

"They have pointed out several solid facts: we have always won the World Cup at home; we will have a Cantabrian leading the team and another directing the backline.

"Our expert team of forecasters predict that on average, the All Blacks will beat Australia in the final at Eden Park, by 23.9 to 15.6."

On the issue of monetary policy, Bollard said that as forecast, the December consumer price index jumped 4% as a result of the goods and services tax increases.

"Despite this, we think price inflation remains comfortably under control. This is the message that was communicated in the December monetary policy statement and repeated in our January official cash review this week.

"Consequently, it now seems prudent to keep the official cash rate low until the recovery becomes more robust and underlying inflation pressures show more obvious signs of increasing."

He told the Christchurch audience that earthquake-related construction spending will add at least $5 billion to New Zealand's nominal gross domestic product. This is "very big" and will add a percentage point to growth in each of the next two years.

"While essential infrastructure rebuilding will be frontloaded, our business contacts suggest much of the commercial rebuild may be a prolonged process lasting several years. All else being equal, this will add some pressure to prices and the exchange rate, but we think this is manageable."

Commenting on the housing market, he said that while firming over the past couple of months, the current level of house sales was consistent with continued softness in house prices this year.

A material slowing in Chinese growth appeared to be a likely scenario, and could be disruptive, he said in comment on international risks.

New Zealand could lose the advantage of the China and Australia growth locomotive that has helped drive export demand over the last twelve months.

"In such a situation, some of the shock would likely be offset by a lower New Zealand dollar, though this would have to be balanced against higher imported inflation."

Yet he said that one possibility for 2011 was that the commodity boom could intensify as over the long term, the infrastructure construction in China was likely to sustain high prices for hard commodities, while rising demand by emerging middle classes in Asia suggests increased demand for protein and soft commodities.



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