Weaker investment tipped to cause sharp downturn

The New Zealand Institute of Economic Research is forecasting a steeper downturn than it was three months ago, but not a recession.

Its latest Quarterly Predictions see growth fall to a trough of 0.7 per cent in the year to March 2007, as against 0.9 per cent in the previous forecasts, driven more by weaker investment than consumption.

For the current March year, the institute has also dialled back its growth forecasts to 2 per cent from 2.3 per cent last time.

Institute director Brent Layton said a couple of negative quarters were forecast over the next year, but not two in a row - the definition of a recession.

The decline in residential investment was understandable. "Migration has slowed appreciably since 2003 and the residential construction market has caught up with the backlog. So the volume of house construction will return over the next 18 months or so to levels close to those experienced before the migration surge hit."

The institute is also predicting "quite a sharp" fall in investment in plant and machinery reflecting declining business profitability and a depreciating dollar which raises the cost of imported equipment.

Layton said consumption and employment, by contrast, would dip but "chug through".

Private consumption, which makes up about 60 per cent of the economy, was growing at an annual rate as high as 6.7 per cent 18 months ago. It is expected to slow to 4.4 per cent in the year just ending and to 2 per cent in the year ahead, as household incomes grow more slowly, before rising again.

But the unemployment rate, now 3.6 per cent, is not expected to get any worse than 4.4 per cent before improving again as an export-led recovery kicks in.