Good news flooding in

By JIM EAGLES business editor

The unexpected strength of the domestic economy is forcing economists to crank up their forecasts for growth over the next 12 months.

Positive economic information has been coming in a steady stream over the past few days, culminating in Monday's announcement of stronger-than-expected retail spending in January and yesterday's surprise jump in the number of jobs advertised last month.

As a result, both Business and Economic Research Ltd (Berl) and Deutsche Bank have issued quarterly forecasts with growth expectations markedly higher than three months ago.

Deutsche Bank, the more optimistic, is now expecting the economy to grow by 3.2 per cent this year, sharply up from the previous forecast of 1.8 per cent. The forecast for next year has been slightly increased to 3.9 per cent.

Berl, similarly, has increased its growth forecast for the next 12 months from 1.8 per cent to 2.3 per cent and has slightly upgraded its figures for the next two years, anticipating growth of 3 per cent next year and 3.4 per cent in 2004.

Both forecasts are mainly driven by the good domestic news, although more positive signs on the global scene are also helping.

Ulf Schoefisch, chief economist with Deutsche Bank, said the starting point for the more optimistic outlook was that last year "finished up much stronger than expected. Most of the domestic indicators were more positive than had been expected and that trend is continuing".

The latest of those indicators, the ANZ Job Ads for last month, also showed unexpected strength, rebounding by 6.2 per cent after a six-month downward trend.

The upturn was particularly strong in Auckland, where the number of ads increased by 11.9 per cent, but was also felt in Wellington and Christchurch.

The number of job ads is still 9.9 per cent below the peak recorded in July, but the fact that firms have started taking on staff again is seen as another pointer to a resurgent domestic economy.

Schoefisch said it was encouraging employment had stayed so firm in the face of strong immigration.

"What we are seeing is that the inward migration has considerably eased the skill shortage which was previously a significant restraint for business and at the same time has reduced the pressure on the wage market and the risk of wage inflation," he said.

"Partially in response to that situation, we have businesses going ahead with capital investment, which will create more jobs and provide the classic prescription for economic growth."

Berl senior economist Dr Ganesh Nana also described the turnaround in migration flow as a key factor driving economic growth. "Whatever the interpretation," he said, "people now want to live here. This provides New Zealand with an opportunity to permanently improve its capacity to produce and compete."

Another key factor of both economic forecasts is the consumer confidence that has produced buoyant retail spending and, along with immigration, set the housing market booming.

The confidence was clearly apparent in an ACNielsen survey of the Asia-Pacific region, which showed New Zealanders to be the most optimistic of all. The survey, carried out in December, found only 45 per cent of New Zealanders thought the world was heading into a recession, compared with 63 per cent of Australians and over 80 per cent of respondents in Japan, Taiwan, Singapore, Hong Kong and South Korea.

Similarly, only 24 per cent of New Zealanders intended putting off major purchases over the next six months, compared with 50 per cent of respondents in Taiwan and South Korea and 62 per cent in Singapore.

That optimism was reflected in the retail sales figures for January, which recorded an unexpected increase, carrying the overall rise in retail spending over the previous 12 months to 9.1 per cent, the biggest gain for two years.

The housing market is also picking up sharply. The number of permits for new houses issued in the final quarter of last year was 22 per cent up on the year before.

The only slightly gloomy note yesterday was the release of worse-than-expected overseas trade figures for the final quarter of last year.

Statistics NZ said export prices fell by 1.8 per cent, while import prices rose 0.4 per cent, for an overall terms of trade reversal of 2.2 per cent. That was markedly worse than the market expectation, which was for the two to balance each other out.

But Schoefisch said a decline in export prices had to be expected and had yet to flow through the economy.

The surge of good economic news has strengthened the view that the Reserve Bank will start raising interest rates at its meeting in May - or perhaps even before.