Economic outlook grim until 2013 - NZIER

Photo / Simon Baker

The outlook for New Zealand's economy will be grim until 2013 after Canterbury's twin earthquakes devastated the region and undermined an already struggling national recovery.

The economy will grow just 0.8 per cent in the March 2011 year, down from 2.1 per cent expansion seen in the December survey, according to the New Zealand Institute of Economic Research's consensus forecast.

The February earthquake heightened the risk of a double-dip recession after it destroyed as much as $15 billion of housing and infrastructure and killed more than 180 people. The forecast for annual growth in 2012 was revised down to 2 per cent from 3.5 per cent.

"Economic forecasters believe the past year was weaker than previously thought, and the recovery has been delayed due mainly to the second Canterbury earthquake," NZIER economist Peter O'Connor said in his report. "Revisions over the past quarter reflect weakening activity in the near term and a delay of reconstruction in Canterbury."

New Zealand was already on the verge of another recession, with fourth-quarter growth of just 0.1 per cent forecast in a Reuters survey following on from an unexpected contraction in the third quarter and wafer-thin growth in the second.

Still, the NZIER survey, which compiled views from 11 financial entities, expects a strong pick-up in 2013 when the rebuilding phase hits full-flight, with 3.9 per cent annual growth predicted from a previous forecast of 2.6 per cent.

The quake is also expected to push out investment activity until 2013, with the 2011 forecast cut to 3.5 per cent from 6.8 per cent and the 2012 projection reduced to 5.7 per cent from 9 per cent. From 2013, investment's forecast to recovery, with the consensus picking 11.3 per cent growth, compared to a 6.3 per cent prediction in December.

Economists don't predict inflation will change course in the wake of the quake, with annual consumer prices forecast to grow 4.6 per cent in the March 2011, 2.6 per cent in 2012 and 2.5 per cent in 2013.

Upcoming wage negotiations will likely ignore the government's 2.5 percentage point hike in consumption tax to 15 per cent last year, and inflation will chew up most of the gains over the next two years. The economists expect annual nominal wage growth of 1.7 per cent, 2.9 per cent and 3.2 per cent over the next three years.

Economists got bearish over the labour market, and expect it to soften over the next two years before a very gradual improvement. The unemployment rate is forecast to rise to 6.7 per cent in 2011, from a previous forecast of 6.2 per cent, falling to 6.4 per cent in the 2012 year from a prior forecast of 5.5 per cent.