Soft landing tipped as growth falls

By BRIAN FALLOW economics editor

A spend-up in this year's Budget, combined with a strengthening global economy, should provide enough parachute to ensure a soft landing for the economy next year, forecasters say.

Deutsche Bank, in quarterly forecasts published today, expects gross domestic product growth to slow from an estimated 3.5 per cent last year to 3 per cent this year and 2 per cent next year.

Bank of New Zealand economists last week put out a similar track: 2.9 per cent growth this year, 1.9 per cent next year.

The economy is already slowing as the higher exchange rate begins to bite on exporters' incomes and the decline in the net inflow of migrants over the past six months catches up with the housing market.

A slowdown in residential construction will trim GDP growth rates, even though the level of building activity may remain high by historical standards, says Deutsche Bank chief economist Ulf Schoefisch.

Monetary conditions, reflecting the level of the exchange rate and interest rates, are the tightest since 1997 and point to a hard landing in 18 months' time, even without the migration downturn.

But offsetting that will be the positive impact of improving world growth and about $1 billion in new spending initiatives the Government has foreshadowed for the May 27 Budget.

The target of that spending boost, people on low to middling incomes, are likely to spend much of it.

And Deutsche Bank suggests that package may be sweetened further in light of the Government's recent slippage in the opinion polls.


The New Zealand dollar has risen 12 per cent over the past year on a trade-weighted basis, on top of a 17 per cent appreciation in 2002. Against the enfeebled US dollar the appreciation has been even more dramatic: 60 per cent over the past two years.

Deutsche Bank is tipping a US71c dollar a year from now, followed by a decline as the current account deficit widens to 6 per cent of GDP, global commodity prices soften and the gap between NZ and US interest rates narrows.

Because of foreign exchange hedging we have yet to feel the full impact of the appreciation which has already occurred, Schoefisch warns, and likewise the benefits of the expected downward correction are unlikely to be felt until the end of next year.

"With favourable hedging contracts increasingly running out this year, export-sector cash flows will deteriorate markedly even though the NZ dollar is not expected to appreciate much further."

Schoefisch believes last month's interest rate hike by the Reserve Bank was unnecessary. For credibility reasons it will tighten again on March 11, but will start backpedal-ling before the year is out.

BNZ economists, however, argue that the economy's resources are fully taken up after a long period of growth at or above the long-run trend, leaving the Reserve Bank in a position where it has to take the steam out of the economy.

"If the currency and the slump in net migration don't bring this about naturally, the Reserve Bank will just keep hiking interest rates."

Either way, the next couple of years could prove more difficult than most of the last decade has been, BNZ says.