Cooler recovery expected over summer

New Zealand Institute of Economic Research says it expects wintry economic conditions this summer. Photo / Paul Estcourt

Businesses should plan for a shallow and volatile economic recovery, the New Zealand Institute of Economic Research says.

In its quarterly forecasts the institute says it expects wintry economic conditions this summer before a more sustained and broader-based recovery from the middle of next year. Based on the past relationship between house sales and gross domestic product nine months later, it sees the weakness of the housing market as pointing to a sharp slowdown in late 2010 and early 2011.

In addition the institute's own quarterly survey of business opinion indicated a slow finish to the year, even without the impact of the Canterbury earthquake, it said. It is forecasting economic growth of 2.3 per cent next year and 2.9 per cent in 2012, following 1.7 per cent this year.

The "hiccup" in growth, combined with escalating global risks and inflationary pressures distant at best, meant the Reserve Bank would be able to hold the official cash rate steady for longer. NZIER expects the next OCR increase to be in June.

"The solution to the global financial crisis is less spending and more saving," NZIER principal economist Shamubeel Eaqub said. "This will hurt demand for our exports."

He expects global currency wars to keep the New Zealand dollar high for some time. "The policy options for managing this appreciation are very limited and could cause more harm than good."