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Stronger recovery still two years away, says NZIER

Tuesday 31st August 2010

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The New Zealand economy will get weaker over election year, 2011, before bouncing back to annual growth near 3% in 2012, says the New Zealand Institute of Economic Research in its latest quarterly predictions, released this morning.

At particular risk are as many as 20,000 jobs in the commercial construction sector, which principal economist Shamubeel Eaqub says is “on the precipice of collapse”, following a sharp contraction in building consents for commercial buildings issued over the last year.

“We remain less optimistic than other forecasters,” Eaqub said. “Businesses should review their risk exposures, investment and hiring plans accordingly.

“We expect economic growth of 2.2% in 2010 calendar year. But it will slow to 1.2% in 2011, before rebounding to 2.9% in 2012. This reflects a weak patch in late 2010 and early 2011.”

This was being caused by very cautious behaviour from both households and businesses, who continue to pay relatively high interest rates, slowing migration, and “an impending slump in non-residential construction.”

Other forecasters on average expect growth of 2.6%, 3.2% and 2.7% in 2010, 2011 and 2012 respectively, said NZIER, which has taken a consistently gloomier view of the New Zealand economic recovery, in part driven by ongoing weakness in its quarterly surveys of business opinion.

Retailers hoping for a burst of spending ahead of the October 1 GST hike to 15% would be disappointed.

“For retailers it will feel like a recession for some time,” said Eaqub. “Impending food price increases and other one-off costs will offset the personal tax cuts for the lower half of income earners.

On the basis of such weakness, NZIER expects the Reserve Bank not to touch its benchmark interest rate, the Official Cash Rate, again before next March, having raised it twice since May to 3%.

“Interest rates for households and businesses are much higher than the OCR or wholesale interest rates. This is strangling the recovery and there is little growth in borrowing,” said Eaqub. “We expect the RBNZ to keep the OCR at 3% until March 2011, and then gradually increase to 5.5% by early 2012. Rates may rise earlier in 2011 if the recovery strengthens.”

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