By BRIAN FALLOW
After a flat patch this year, economic growth should pick up substantially next year as exporters thrive and firms and consumers shake off the blues, says the Institute of Economic Research.
The slump in confidence will continue to dampen activity in the short term as businesses postpone investment and hiring and households cut back on new spending, the institute says in its latest quarterly predictions.
But it is always darkest before the dawn, it adds.
Growth, having slowed to 2.7 per cent in the year to March 2001, is predicted to recover to 3.7 per cent next year, propelled by a thriving export sector and a revival in confidence.
The institute sees some upside for interest rates, with 90-day yields peaking at 7.2 per cent in the middle of next year, about half a percentage point above present levels, and remaining above 7 per cent all year.
But the outlook for the dollar is "not inspiring."
The institute expects the exchange rate to remain between US45c and 50c over the next five years, weighed down by the current account deficit, which it sees as the gravest risk to recovery.
Despite a large currency depreciation over the past three years, the current account (the difference between what New Zealand earns overseas and what it spends) has deteriorated.
Merchandise exports rose 14.7 per cent by value in the year ended July, but allowing for the currency's decline over that period, the world value of those exports rose 9 per cent, and about half of that increase was due to rising prices, implying that the increase in exports was only about 4.5 per cent.
That is less than half the real export increase that occurred after the previous cyclical trough in 1991-92.
Forward cover and other exchange rate hedging strategies tend to delay the benefit of a weaker currency, while agricultural export volumes cannot, of course, be increased at will just because farm gate prices are good.
However the institute expects export prices and volumes both to improve over the coming year.
Meanwhile, the weaker dollar has so far done little to reduce our appetite for imports.
Possible explanations the institute cites are:
Tariff removals and other free-market policies have led to such a reduction of import-competing industries that retailers are no longer able to switch orders to local firms.
The world price of many imports, especially manufactured goods, has been falling, offsetting the effects of a weaker dollar.
A more competitive environment, especially for retailers, has made it harder to pass price rises on to consumers. Profit margins have had to take the strain.
Economist Phil Briggs says household spending is constrained by high debt levels, while employment and wage growth are not strong and higher petrol prices are biting.
While more exporting is essential for growth in the broader economy and for rescuing the current account, the key to a sustained improvement in the latter remains improved national savings.
Economy tipped to lift next year
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