Growth to halve say economists

By BRIAN FALLOW economics editor

Economic growth will slow from around an annualised 4 per cent in the first half of this year, to 2 per cent by late next year, Deutsche Bank says.

In their latest quarterly forecasts, the bank's economists say the key factors which have supported the economy over the past year - the low New Zealand dollar, good terms of trade, strong inward net migration and low interest rates - will either reverse or become less supportive.

They expect growth among New Zealand's trading partners to strengthen from 3.1 per cent this year to 3.9 per cent next year - a forecast more optimistic than the consensus.

That will be partially offset by further appreciation of the New Zealand dollar to 52USc over the year ahead, from 48USc now.

But they expect weaker growth on this side of the Tasman to pull the cross rate back from 87Ac now to 85Ac in a year's time.

They expect uncertainty about how much higher the dollar will go to retard investment in the manufacturing sector and to combine with weaker commodity prices in reducing rural incomes.

At the same time the stronger dollar will reduce import prices, helping inflation fall from 2.8 per cent now to around 1.5 per cent.

Deutsche Bank thinks the Reserve Bank will raise interest rates one last time (in this cycle) on August 14, lifting the official cash rate to what is perceived to be a neutral level of 6 per cent.

They think there is a one-in-three chance that the OCR is already as high as it needs to go, even though only two months ago the Reserve Bank was saying it would need to rise to 6.75 per cent to ensure inflation got back below 2 per cent.

But since then, and partly because of the Reserve Bank's aggressive policy, the dollar has climbed, putting downward pressure on inflation.

Uncertainty about the US recovery has increased because of the parlous state of its sharemarket.

And Finance Minister Michael Cullen has signalled that, assuming he is returned to power, he will rewrite the policy targets agreement with the new governor of the Reserve Bank, yet to be appointed.

"That will force the bank to adopt a less aggressive approach," says Deutsche Bank.