Opening books rub shine off currency

By Brian Fallow

WELLINGTON - The Treasury is counting on a surge in exports to propel the economy over the next three years and haul back a forecast blowout in the current account deficit.

The economic numbers in yesterday's pre-election opening of the books were generally in line with private sector forecasts.

They are based on an export recovery story, in which improving world growth, recovering commodity prices, higher export volumes and a competitive exchange rate will broaden the recovery from the consumption-led pick-up we have had so far.

Annual average growth for the current March year has been revised down to 2.3 per cent from 2.9 per cent in May's Budget; that reflects the June quarter's surprise contraction which has otherwise been discounted as an aberration.

GDP growth then picks up to 3.5 per cent (unchanged from the Budget) and 3.3 per cent for 2001/02 (3 per cent in the Budget).

The only major surprise in the Treasury's numbers was the current account deficit, forecast to climb from its current 6.3 per cent of GDP to 8.3 per cent ($8.5 billion) by the March next year before falling to around 6 per cent for the three following years.

Private sector forecasts also anticipate a near-term deteriorating of the current account deficit, but to 7 or 7.5 per cent of GDP.

Treasury attributes the balance of payments blowout to three factors:

* One-off imports, collectively worth around $800 million including the second frigate, an interisland ferry and an oil tanker.

* A deterioration in the terms of trade, with crude oil prices climbing while prices for New Zealand export commodities remain weak.

* Recovery in the returns on foreign investment in New Zealand.

The Treasury forecast a sharp 8.2 per cent rebound in export volumes in the year to March 2001.

Meat and dairy exports are expected to grow 11.8 per cent reflecting recovery from last season's drought, reinforced by good growing conditions this winter.

That was plausible, if a little bullish, said Dr Rob Davison of the Meat and Wool Boards' economic service.

The improved sales being reported by manufacturing exporters and the tourism sector are expected to continue.

Import growth, meanwhile, is expected to slow markedly from its current hot pace, which is boosted not only by ship imports but building of inventories and by Y2K-related computer imports.

"If you smooth through the two numbers [this year's 10.2 per cent and next year's 2.9 per cent] import growth is still fairy solid," said Deutsche Bank chief economist Ulf Schoefisch.

Bank of New Zealand chief economist Tony Alexander said that import levels reflected underlying demand in the economy, rather than temporary factors like a precautionary build-up of inventories or a surge in car imports after the removal of tariffs, then the trade and current account deficits would remain at higher levels and for longer than the Treasury had assumed.

The financial markets took the figures in their stride.

Mr Schoefisch said it took the shine off the currency which had been looking a little healthier. The dollar ended the day around 51.3USc, unchanged from Wednesday, while 90-day bills gained 2 basis points to 5.15 per cent.

The Treasury expects inflation to spike up to 2.7 per cent by March next year, mainly because of higher oil prices, before falling back to around 2 per cent.

The Reserve Bank is expected to tighten monetary conditions, but only gradually, with 90-day wholesale interest rates peaking at 7 per cent in the 2002 year accompanied by a modest rise in the exchange rate.

The Treasury sees the trade-weighted index appreciating to 56.3 by March next year (it is 54 now) but not reaching 60 until 2003.

Wages growth is forecast to recover from 2.3 per cent this year to 2.6 per cent next year and around 3 per cent in the out-years.

Job growth is forecast to strengthen, peaking at 2.7 per cent in 2001. But even with net emigration continuing until 2002, employment growth will pull the unemployment rate back only slowly from its current 7 per cent to 5.7 per cent two years out.