NZ economic growth to slow sharply, says poll

New Zealand's economic growth is expected to slow sharply this year as a ballooning current account deficit, strong currency and the industrialised world's highest interest rates take their toll, a Reuters poll shows.

However, economists are less pessimistic about this year's growth prospects than they were in a July poll because of the strength of domestic consumption and business investment.

Despite the expected slowdown in economic growth, the Reserve Bank today hiked the official cash rate to a record 7 per cent to head off oil and spending-fired inflation, which is already above its 1-3 per cent target.

The move was widely expected by economists. Economists expect consumer inflation to be 3.4 per cent at the end of this year compared with July's forecast of 2.9 per cent, before easing to 2.7 per cent by the end of 2006.

The economy is expected to grow 2.5 per cent in 2005, the poll of 10 research houses found, higher than July's 2.3 per cent forecast, but well off 4.4 per cent growth in 2004.

Growth is seen slowing further in 2006 to 2.1 per cent, unchanged from the median view in July's survey.

A convergence of unpalatable factors has some economists saying a hard landing, or even a recession, awaits New Zealand.

"I think it's quite a possibility. The key is the housing market. When that stops rising, it doesn't have to drop, just stops, then the wealth effect gets shut off and the economy's got no legs left to stand on," said Westpac Bank chief economist Brendan O'Donovan.

The economy, which averaged nearly 4 per cent growth between 2000-2004, has become unbalanced. The external sector has taken a hit from the high New Zealand dollar, and consumers have gone on a debt-funded spending binge, bolstered by rising house values and wages.

O'Donovan said domestic consumption, which makes up around 60 per cent of the economy, has anchored growth and, along with business investment in new buildings and plant, had prompted analysts to upgrade their 2005 outlook.

"Capital expenditure continues to boost growth, though lately the driver is increasingly government infrastructure work rather than the private sector," he said.

While the New Zealand dollar has eased from March's 23-year high, its strength is still curbing exports and pressuring the current account deficit.

The accumulated annual deficit in June was a record NZ$11.9 billion, or 8 per cent of gross domestic product.

The poll sees a 2005 deficit of NZ$13.5 billion, narrowing slightly to NZ$13.3 billion in 2006. Historical data:

- REUTERS