NZIER slashes forecast

By BRIAN FALLOW

The Institute of Economic Research has slashed its growth forecast for the year ahead, citing the impact of the Sars virus and electricity shortages.

The institute's quarterly predictions have growth peaking at 4.5 per cent in the March year just ended but declining to 2.2 per cent in the year ahead and 1.8 per cent in the year to March 2005.

It has lopped 0.5 per cent off its previous forecast for the current year to reflect the impact of Sars on growth in Asia, transmitted to New Zealand largely through lower tourist numbers.

It has trimmed a further 0.2 per cent of the forecast for the power crisis. Even though recent rain has lifted hydro lake levels, they remain below average for this time of year, indicating there could still be problems, the institute says.

On the positive side of the ledger, oil prices fell and the Reserve Bank started easing earlier than expected three months ago, said institute economist Doug Steel. And net immigration had remained strong.

The decline in growth in the year ahead would be driven primarily by the effect of lower world growth and the higher dollar on exports volumes.

The following year growth would remain subdued because of the lagged effects of lower export incomes on consumption and to a lesser extent investment.

The institute estimates export returns fell $1.9 billion or 4.4 per cent in the year to March 2003, and will fall a further $2 billion this year.

But just as economic growth had not matched the surge in export revenue on the way up, it would not match the recent and forecast declines in export revenue either.

Steel said the reason was that businesses had saved more than usual during the high-income years, investing only to relieve capacity constraints but not in anticipation of strong growth in demand. Levels of uncertainty had been too high.