Economy to expand at lower level, says Treasury

3.20pm

The economy will expand at a lower level in the coming year because of the weaker world environment, but stronger near term domestic factors would offset the impact, the Treasury said today.

Annual average growth was expected to be 2.6 per cent in the year to March 2002, rising to 3.3 per cent the following year, the Treasury said in the Budget Economic and Fiscal Update documents for the budget.

"The outlook for the year ahead is weaker than previously forecast owing to weaker world growth prospects," Treasury said.

"However, the timing and magnitude of flow through to the New Zealand economy are far from clear," it added, saying that consensus forecasts for world growth for the current year had fallen to 2.4 per cent from 3.7 per cent.

Treasury said the economy was well placed to absorb the impact on the export sector, with the adjustment already underway.

"Near term growth will be maintained by continuing but moderating export growth and reversal of the recent falls in residential investment and consumer spending ... a historically competitive exchange rate and high export prices have also provided important offsets to the lower demand from the rest of the world."

The Reserve Bank of New Zealand, having cut the cash rate three times in recent months to 5.75 per cent from 6.5 per cent, was expected to remain around current levels through to mid-2002, Treasury said.

Firms were seen being more cautious in light of the global uncertainty, with employment staying relatively unchanged in the short term, but overall the labour market was seen remaining strong with unemployment moving to five per cent in the medium term.

Inflation was expected to fall as lower GDP growth put less upward pressure from the domestic economy, Treasury said.

Consumer price inflation was forecast to be 2.3 per cent in the year to March 2002, falling to 1.7 per cent in the March 2003 year.

Inflationary pressures were also seen to be eased by interest rates, with the benchmark 90 day bank bill forecast at 5.8 per cent average in 2001/02, while there would also be a "modest but sustained appreciation of the exchange rate," the agency said.

The New Zealand dollar trade weighted index was forecast to be 52.1 on average in the March 2002 quarter, and 55.0 a year later.

The current account deficit was forecast to show further improvement as economic growth picked up in 2002/03, reducing to 4.75 per cent in 2002, from an estimated 5 per cent for the current year, falling gradually to 3.5 per cent by the March 2005 year.

- REUTERS