Buckling up for a hard landing

The country needs to brace for a hard landing because the economy is not slowing fast enough to bring inflation under control, the latest National Bank Business Outlook survey says.

The bank's survey shows business confidence has changed little from last month, with a net 31 per cent of businesses expecting conditions to deteriorate over the next 12 months.

Similarly, companies' expectations for their own trading were little changed, with a net 15 per cent expecting their business to pick up.

But with inflation running at 4 per cent a year, National Bank chief economist Cameron Bagrie said the economy was heading towards a hard landing, with a growth rate of 1 per cent a year likely by the middle of next year.

"Unfortunately, that's just because of the inflationary dynamic we're seeing in New Zealand," Bagrie said. "A soft landing is just not going to cut it."

The present economic growth rate of 2 per cent a year would be considered a soft landing.

The survey says an increase of 4 per cent to a net 39.5 per cent of businesses expecting to increase prices suggests inflation will rise further.

Bagrie said a hard landing could be considered to be better than the traditional cycle of boom and bust.

Nonetheless, it would lead to lay-offs, increased unemployment and a fall in house prices.

"So I don't think you can call even a 1 per cent growth scenario exactly a happy outcome because there are going to be big chunks of New Zealand ... moving backwards."

He said fixed lending rates of more than 8 per cent would bite into the consumer sector.

"New Zealand is going to be devoid of an economic engine in the second half of 2006 and early 2007."

Outlook

* Net 31.1 per cent pessimism.

* Net 14.9 per cent positive about own trading.

* Net 39.5 per cent expect to increase prices.