Economic outlook good, but could be better

Independent economic group Berl is forecasting continuing robust economic growth of more than 3 per cent that would rise steadily to 3.5 per cent over the next three years.

But, in issuing Berl's latest forecasts, senior economist Ganesh Nana also made an impassioned plea for monetary shackles to be relaxed when a new Reserve Bank governor is appointed so even higher growth could occur.

"It seems hard to see why the potential capacity for the economy to grow, moving forward, is set at only 3 per cent [per annum]," he said.

The Reserve Bank believes growth above 3 per cent a year is inflationary and it invariably tightens monetary policy via higher interest rates as the economy approaches that rate.

Berl argues the resignation of Reserve Bank Governor Don Brash to go into politics has given the Government a rare opportunity to cement a "growth-friendly" inflation target.

An overly tight monetary policy prevents the increases in capacity that should be achieved - which in turn constrains productivity increases.

Dr Nana also argues that increasing capacity improves the economy's ability to fight inflation by increasing supply.

"If we forever put a cap on capacity, it means that we inevitably end fighting inflation through higher interest rates, rather than through higher productivity.

"There may be a risk of higher inflation, but given the positives in the economy at the moment, we need to take the opportunity to rebalance our policy environment," Dr Nana said.

An over-zealous interest rate policy becomes self-fulfilling and results in a mediocre 2-3 per cent growth rate, he said.

Berl said signals from the latest Reserve Bank monetary policy statement implied "an extremely severe monetary tightening over a relatively short period of time".

"During a time of ... election uncertainty, business confidence and global uncertainty, such a 'growth-unfriendly' tightening would seem unwarranted ... "

Berl's forecasts of 3.2 per cent growth in 2003, rising to 3.3 per cent in 2004 and 3.5 per cent in 2005 assume the signalled rise in the official cash rate to 6.5 per cent next year will not occur.

Berl's growth forecasts are higher than the Reserve Bank's and Treasury's.

A side-effect would be higher-than-forecast budget surpluses.

"All this suggests that there is emerging headroom for either a reduction in taxes or an increase in spending beyond that currently provided for."

Dr Nana said Berl would be disappointed if another bank economist was appointed as governor.

"Monetary policy is supposed to be set for the economy, not for the banking system, and the economy is about people and business and jobs, not just banks."

He said who got the job depended on how brave the politicians were going to be. Someone from Australia, where the operation of monetary policy had been more relaxed, might be a good idea.

The Government had plenty of "elbow room", and if the New Zealand dollar fell in response, few tears would be shed.

- NZPA