More growth, jobs in budget forecast

By BRIAN FALLOW

WELLINGTON - The Treasury sees more growth and jobs in our immediate future than it did in its pre-election economic forecasts, but also higher inflation and interest rates.

Compared with those forecasts, yesterday's budget policy statement depicts a more pronounced cycle, with more growth in the near term and less further out.

The change largely reflects a stronger pick-up than expected in the second half of last year, resulting in less spare capacity and the Reserve Bank tightening sooner, and harder.

Economic growth is now expected to peak at 4 per cent later this year before easing to 2.5 per cent two, three and four years out.

The forecasts have unemployment averaging 5.5 per cent over the next couple of years before picking up slightly to 5.8 per cent further out.

Inflation is forecast to be at or above 2 per cent for the next five years.

The Treasury's forecast track for interest rates has wholesale 90-day rates at 7.3 per cent this time next year - implying floating mortgage rates of at least 9 per cent - rising to 7.8 per cent a year later and still at 7.5 per cent in March 2003.

The Bank of New Zealand chief economist, Tony Alexander, said while that outlook might be tougher than most market forecasters' for the longer term, if anything the forecast for a year from now could be too low.

"The futures market is pricing 90-day bills at 8 to 8.5 per cent in the first half of next year. Given the bias in the market, the 7.3 per cent Treasury are forecasting would only require an official cash rate of 6.5 per cent."

The Reserve Bank is widely expected to raise the official cash rate to 5.75 per cent next week and to continue tightening throughout this year.

The Treasury said this tightening started from a stimulatory position, with the monetary conditions index (which also reflects the exchange rate) now at levels comparable with the previous low point in the early 1990s.

The budget policy statement says: "Despite the upward trend, interest rates and the exchange rate peak considerably below the levels seen in 1996, and they ease from early 2003 as inflation pressures abate."

The Treasury's forecasters, who were among the first to predict that the current account deficit would breach the 8 per cent of GDP mark, still expect it to hit 8.5 per cent in the March 2000 quarter and then to gradually reduce as the trade balance improves.

But even four years out they still expect the current account deficit to be 5.6 per cent of GDP, implying that over the next four years the stock of non-residents' claims on the New Zealand economy will be growing faster than the economy itself.