NZIER gloomy on growth

By COLIN JAMES

The Institute of Economic Research has revised down its medium-term growth forecast as the exchange rate has continued to rise and the international economy has failed to fire.

In December the institute forecast 2.5 per cent and 2.4 per cent growth for the years to March 2004 and March 2005 respectively. Yesterday it lifted the March 2004 forecast to 2.7 per cent but sharply cut the forecast for the following 12 months to 1.9 per cent.

This compares with the Reserve Bank's forecasts last week of 2.5 per cent and 2.25 per cent respectively.

The institute's forecast for the next two years is a sharp drop from the likely growth for the year to this March. It estimates this at 4.3 per cent, on the back of strong household spending, new house investment and increased exports.

A year ago - demonstrating how difficult forecasting the economy has been over the past year - the institute's forecast for the year to this March was just 1.7 per cent.

Accordingly, it hedges its latest forecast with warnings about the international economy and its potential impact. Specifically, it worries about slower growth in Australia resulting from the drought, the impact of war in Iraq (uncertainty about which is impeding business investment) and any prolonged plateau in the oil price.

But the institute expects the domestic party to last a little longer.

"The substantial export receipts of 2000-01 and 2001-02 will continue to buoy household expenditure for much of this year."

Then domestic spending will fall, it says, troughing in the 2004-05 year.

The reason for the slowdown: "In 2002 the exchange rate appreciated nearly 15 per cent on a trade-weighted basis. We forecast a further 10 per cent rise this year."

As a result, "over the next 18 months exporters will feel the effects of the appreciation of the dollar", cutting revenue despite increasing volumes - and that increase assumes the current dry weather does not become a drought and cut production.

The institute expects the Reserve Bank to cut the official cash rate by 0.5 per cent in the second half of this year.