Economists warn looking too closely could hurt

By JIM EAGLES business editor

If New Zealand consumers notice that the good times are over - for now - the economy could be in real trouble.

That is the key message from the Institute of Economic Research's latest quarterly predictions released this morning.

Expectations of falling commodity prices, lower export volumes and declining tourist numbers have led the NZIER to forecast declining growth.

For the present year, to the end of March, it has cut its expected growth in GDP from 3.1 per cent to 2.8 per cent.

Its prediction for the following 12 months is for the economic growth rate to slow to a still relatively robust - by recent standards - 1.7 per cent.

But it emphasises that this is dependent on households continuing to spend up large in spite of the global downturn.

"However, if consumers were to focus more narrowly on current conditions, confidence could crumble. This could lead to lower growth in private consumption in 2002-2003 than we forecast."

The institute takes a fairly pessimistic view of the present economic reality.

Export prices are predicted to continue falling, exacerbated by a mild appreciation in the value of the New Zealand dollar, with terms of trade likely to decline by a further 5.2 per cent in the next 12 months.

In addition, the institute thinks the slow world economy will limit the scope for increased trade, and it is forecasting a mere 2 per cent growth in exports in the next year.

While tourist numbers have bounced back, as fear of terrorist attacks has declined, the institute also warns that the global recession will still have an effect.

It is forecasting growth in tourist numbers to slow from around 7 per cent in recent years to more like 2 per cent in the coming year.

To offset that global gloom it is looking to domestic demand to keep the economy ticking over.

"Consumption growth is forecast to remain solid as households spend some of their income from previous years," it says.

"Relatively low real interest rates will encourage households to borrow and spend rather than save.

"A net inflow of migrants will also lift domestic demand."

The institute bases those predictions on the high level of consumer confidence "which suggests that at this stage consumers are undaunted by the international downturn".

NZIER economist Vari McWha said consumers were still spending as though incomes were rising as fast as they had done in the last couple of years.

But in fact improvements in disposable incomes had slowed considerably in the past 12 months and were predicted to slow still further in the year ahead.

In the year to the end of March 2001 household disposable income rose by a healthy 5.9 per cent she said. However, in the year ending this month, disposable income increased by 3.8 per cent and in the next 12 months it was predicted to go up by 2.6 per cent.

"At this stage," McWha said, "income growth is weakening but consumption is holding up.

"If consumers start acting on the basis of what is happening now, rather than on what has happened over the past couple of years, then the picture might change considerably."