Economic recovery should be stronger, says NZIER

Economic forecasters say New Zealand's recession was shallower than expected and next year's recovery will be stronger than predicted six months ago - though they differ widely on the extent of the rebound.

The economy is expected to contract 0.4 per cent in the year ending March 31, 2010, milder than the 1.6 per cent contraction forecast in June, according to a consensus forecast survey released today by the New Zealand Institute of Economic Research.

The survey outlook for the year beyond next March is a very positive 2.8 per cent GDP growth, though there is an unusually wide forecast range of 1.8 per cent to 3.7 per cent.

"What's really surprising is how divergent forecasters' views are across the board," said NZIER economist Shamubeel Eaqub.

"This is across everything including growth, current account balances, inflation and especially the level of the Kiwi dollar."

The forecasters expect unemployment to remain stubbornly high at 7 per cent over the March 2010 and March 2011 years, before improving to 6.3 per cent in March 2012.

Such prolonged and elevated levels of unemployment will be a dampening factor for households and industries.

Of all the survey data, the most divergent of forecast views is around the future level of the trade-weighted index of the New Zealand dollar. Some predict the TWI will climb to above 70 in the next two years, from 65.38 now. Others predict it will decline to as low as 50 - a level last reached in 2001.

"It's hard to tell what is going to be the big catalyst for importers and exporters going forward," said Eaqub. While a weak US dollar hasn't helped those traders linked to its fortunes "forecasters believe a favourable Australian dollar and euro rate will help stage a relatively strong rebound for exporters."

The Christmas period is going to be a test for retailers, he said.

There are a number of risks and uncertainties, with interest rates set to increase, the volume of sales in the housing market slowing and the Reserve Bank not yet indicating how much it will increase interest rates.

"Households also appear to have learned from the recession and have kept a cap on spending," Eaqub said.

"They're more cautious than in recent years, and when lowering spending on discretionary goods such as LCD TVs, have put more of it into buying things such as basic food groups. The hope is households may be moving to a bit more of a sustainable path."