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Economic slowdown to hit over next 12 months

-Press release

Friday 29th June 2007

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The strong start to economic growth in 2007 will fade over the second half of this year, according to Infometrics latest forecasts released today (Friday).

Infometrics forecasts the economy to expand just 1.9% over the year to March 2008. Growth in both business investment and household spending will remain soft throughout much of 2008 as the economy grapples with tight monetary conditions.

Business investment is forecast to grow by just 0.2% over the 2008 calendar year, with household spending expanding by 2.3%.

The accumulated effect of the Reserve Banks three interest rate rises since March is already showing in business and consumer confidence, said Infometrics managing director Gareth Kiernan.

Firms are again becoming more cautious in their investment and employment decisions, and we expect the unemployment rate to climb to 4.3% by mid-2008.

Infometrics also sees early signs that the housing market is losing momentum, with sales growth waning since February this year. The property market has been hit by a 90 basis point jump in fixed mortgage rates since mid-March and increasing numbers of people leaving for Australia.

High interest rates will persist for the next 12 months, and net migration is expected to drop from an annual inflow of 10,682 currently to an outflow of 2,788 by September next year.
Infometrics forecasts house prices to fall almost 3% over the year to March 2009.

New Zealands economic outlook would be even worse if it wasnt for the recent surge in dairy prices. The lift in dairy prices is shaping up as the biggest positive terms of trade shock since 1973.

The boost to agricultural incomes will mitigate the impending economic slowdown in provincial areas, said Kiernan. High dairy prices are likely to be sustained over the medium term as global demand for protein continues to grow.

The Reserve Bank is likely to lower interest rates from the second half of next year as domestic inflation pressure ease. Investment, household spending, and employment growth will all recover from 2009 onwards, and the real estate market is expected to stabilise as well. Infometrics forecasts economic growth to average 3.2%pa between 2010 and 2012.

The weakest part of the economy will continue to be the export sector, with the New Zealand dollar expected to average 66 on a TWI basis over the next five years.

The sustained lift in the exchange rate is a response to the improved terms of trade the increase in export prices means that exporters, on average, are better equipped to cope with a stronger currency.

However, the gains will be unevenly spread, with the dairy and forestry sectors enjoying the strongest lift in returns. Weak growth in other export sectors will keep ensure overall export volume growth remains lacklustre, averaging just 3.2%pa over the next five years.

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