OECD has positive view on economy

The OECD, in a generally rosy outlook report on the New Zealand economy released yesterday, said stretched resources should soon cool to "more normal rates of growth".

The Paris-based Organisation for Economic Co-operation and Development estimated economic growth will continue to decline gradually - from 4.4 per cent in 2002 to 3.3 per cent this year, 3.2 per cent in 2004 and 2.9 per cent in 2005.

Growth through the 30-member group is forecast at 2 per cent in 2003, rising to 3 per cent next year and 3.1 per cent in 2005.

The report forecast that the housing boom behind much of New Zealand's current growth was likely to continue for some months "especially if speculative dynamics take hold in the housing market".

The organisation is upbeat about the world economy, stating that global activity is picking up through the club of rich nations.

"Growth, which has languished below potential during the past three years, has firmed to an annualised rate probably exceeding 3 per cent in the second half of 2003 and is set to continue at about that pace during the 2004-2005 projection period."

Although US expansion may slow somewhat from the roaring annualised rate of 8.2 per cent in the third quarter, it "should retain substantial momentum".

Japan is also seen as continuing a cyclical recovery.

The report notes that activity has been very strong over the past four years in New Zealand.

Strong immigration accompanied by rising house prices had outweighed the negative impulse from an appreciating exchange rate that had weakened the productive sector.

The latter should have filtered through to the rest of the economy by now but the domestic economy surged by over 6 per cent thanks to vigorous consumption spending and the housing boom.

The rising currency had masked quite high domestic inflation - estimated at 4 per cent - but these factors were likely to continue to counterbalance each other. The annual inflation rate is seen rising from the current 1.5 per cent to 2.3 per cent by 2005.

The report notes that Reserve Bank Governor Alan Bollard faces "an awkward juggling act between the booming housing sector and subdued export earnings".

The Government comes in for praise for "prudently" resisting an urge to spend despite having one of the largest surpluses at 4.4 per cent of GDP in the OECD in 2002-2003. (The OECD average in 2003 is estimated at minus 3.8 per cent of GDP.)

"Next year's budget is likely to respond to spending pressures in the areas of infrastructure and income support for low-income families."

However, it advises "the Government should continue to exercise caution in raising expenditure until the evidence is clear that the revenue surprise is permanent".

The OECD warns that the budget windfalls "could prove temporary in view of the long-term fiscal gap arising from the ageing of the population". It expects the export sector to pick up as the global recovery picks up pace.

The agency notes it may have underestimated New Zealand's growth if the housing market developed into "a full-blown bubble", in which case the export recovery could coincide with domestic demand continuing apace.

Such a scenario would put the 0-3 per cent inflation target at risk.

Alternatively, a substantial fall in residential construction could result in a rapid fall in household consumption and a lower than forecast growth rate.

The current account deficit is estimated at 5 per cent of GDP over the next few years and unemployment at 5 per cent.

- NZPA