Strong dollar greatest recovery threat, ASB

Friday 19th June 2009

Continued strength of the New Zealand dollar remains the biggest threat to economic recovery, which ASB economists still expect to take hold in 2010.

While the ASB expects next Friday's March 2009 quarter Gross Domestic Product (GDP) figures to be better than previously forecast, big jumps in dairy and meat processing are the cause, and underlying weakness in manufacturing production is likely to be exposed in the second quarter results.

Instead of expecting a 0.9% contraction in GDP for the three months ended March 31, ASB now predicts a 0.5% contraction. However, as the agricultural production spike unwinds, the second quarter is forecast to show 0.9% contraction instead.

The last half of the year should be more stable, with recovery taking holding in 2010, unless international events or a persistently high kiwi dollar undermine prospects.

The kiwi recently traded at 63.83 US cents as investors continued to ignore central bank Governor Alan Bollard’s warning earlier in the week that if “markets were buying the New Zealand dollar on the expectation of a strong recovery they may end up being disappointed.”

Weakness in the retail and wholesale sectors are idenitified as the key drivers of a recession which will record its fifth quarter of negative growth if the ASB and other banks' forecasts are correct.

"The pressure for further Official Cash Rate cuts will continue to mount, the longer current levels of the NZ dollar and longer-term interest rates persist," the ASB says. "While the market seems to have largely ignored the Reserve Bank of New Zealand's easing bias, we have pencilled in two further 25 basis point rate cuts in September and October."

Businesswire.co.nz

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