NZ exporters face tougher times

By BRIAN FALLOW

Exporters will find the going heavier in the year ahead, but the domestic economy will find it easier, says the Institute of Economic Research.

The net effect will be for economic growth to average about the same in the coming March year as in the past one, around 2.6 per cent, according to NZIER's quarterly predictions.

Growth in our trading partners will be around 2.5 per cent, half what it was last year but still twice the growth they recorded in 1998 after the Asian crisis. The United States' slowdown should last for three quarters, with recovery getting under way later this year.

Manufactured exports are especially sensitive to slowdowns in Australia and the US, which take 40 per cent and 19 per cent respectively of our manufactured exports. Nevertheless, NZIER expects manufactured exports to grow around 4.5 per cent in volume terms over the coming year, although that is only half the average growth rate recorded over the past decade.

Exports of meat and dairy products are expected to continue to rise, but farm gate prices are expected to fall, reflecting weakening world prices and an appreciating New Zealand dollar.

In the meantime, however, the benefits of last year's export boom will flow through to the domestic economy.

Households' spending power will be boosted by a gradual rise in wages, an easing in inflation and lower interest rates, all of which lift real disposable incomes. The institute expects the Reserve Bank to cut the official cash rate next month at the latest.

Cost pressures on firms will remain a problem in the short term, NZIER says, though the worst is past.

Firms' input producer prices have been rising faster than output prices, both boosted by the lower dollar and input prices by higher world oil prices too. NZIER expects those pressures to moderate over the coming year, while firms, like households, should benefit from lower interest rates as well, provided the Reserve Bank plays along.

But labour costs will increase. The institute forecasts wage growth to rise from 2.5 per cent in the March year now ending to 3.3 per cent in the year ahead. Factors driving this include harder bargaining by employees as they seek to make up ground for recent rises in inflation and continuing skilled labour shortages, exacerbated by net emigration.

Business investment is forecast to remain robust for some quarters yet, but then to ease as lower growth in export earnings begins to bite and profit growth slows.

Residential building, where activity has been falling, is expected to bottom out over the coming year under the influence of lower interest rates. "However, robust growth will not occur until the following year."

The main risks to these forecasts, NZIER says, lie overseas. If our other trading partners are more affected by the US downturn or the US fails to recover as quickly as expected, then export growth is likely to slow more dramatically than forecast. Exporters would cut investment and wage growth would slow.