Solid, sustainable growth tipped

By BRIAN FALLOW

WELLINGTON - The Treasury expects that, after a burst of above-trend growth over the past year, the economy will expand at a more "solid and sustainable" pace over the next three years.

It estimates the economy grew 4.2 per cent in the year to March 2000 and forecasts a slowing to 3.7 per cent in the year ahead, 2.7 per cent the year after and 2.2 per cent in 2002/03.

That would make average growth over the next three years a little under 3 per cent, which is where most estimates of New Zealand's sustainable non-inflationary growth rate lie.

The Budget notes, however, that since its forecasts were finalised a month ago business confidence has declined sharply.

"There is a risk of this low confidence translating into lower activity levels than in the central forecast," it says.

At the same time, a drop in the exchange rate and a rise in oil prices, which has added 7c a litre at the pumps, could push inflation temporarily to 3 per cent by the end of the year.

The Treasury's postscript stops short, however, of saying: ignore the central forecast and focus on the alternative, weak domestic demand scenario. That has growth halving to 2.1 per cent in the year ahead before recovering, thanks to a more stimulatory monetary policy, to 2.8 per cent a year for the out years.

The Treasury's central forecast, upon which its fiscal projections are predicated, are more conservative than those the Reserve Bank published last month.

The bank had growth still running at 4.6 per cent in the year ahead before dropping to 2.7 and 2.6 per cent in the out years.

The weaker growth scenario inevitably would take its toll on the Budget surpluses by about $600 million a year, which would be a setback to Finance Minister Michael Cullen's plans to set aside funds from the projected surpluses to draw on for future New Zealand superannuation payments.

As it is, some financial market economists, such as National Bank chief economist Brendan O'Donovan and his ANZ Bank counterpart, Bernard Hodgetts, question the credibility of the Government's cap on new spending of $5.9 billion over the next three years.

They point out that the decision to "front-load" the new spending in the coming year would leave relatively few lollies ($550 million and $575 million respectively) to scramble for in next year's Budget and the following one.

The Treasury's forecast story is an export-led expansion, driven by strong world growth and a stimulatory exchange rate.

It sees export volumes growing 9 per cent in the year ahead and 6 per cent next year, with forestry and manufacturing posting the strongest growth, supported by meat, dairy and tourism.

The consumer's contribution to overall growth is expected to ease back, however.

Household incomes will benefit from a tightening labour market, with unemployment expected to drop to 5.3 per cent in two years, while wage growth picks up to 4 per cent.

But higher interest rates, tax increases and higher petrol prices are expected to limit the extent to which that income growth flows through to consumption.

Two factors which boosted consumption during the last cycle - a wealth effect from rapidly rising house prices and a willingness to ramp up debt from what in the early 1990s were relatively low levels - are expected to be absent this time round.

The Treasury is expecting to see a lift in business investment under the twin influences of a strong export outlook and a lack of spare capacity.

While investment is expected to grow 14 per cent in the March 2001 year and remain at around 10 per cent thereafter, those numbers are skewed upward by computers.

Excluding computers, forecast investment growth peaks at 12.5 per cent in the year ahead before falling to 5.2 per cent the following year and 2.8 per cent by 2004.

On the inflation front, the Treasury sees a blip in the year ahead from petrol prices and the increase in tobacco tax.

Further out, the pressure is expected to come from wages, but to be contained by the lagged effects of tighter monetary conditions.

Its forecasts imply further interest rate rises by the Reserve Bank, with 90-day interest rates, at present 6.9 per cent, peaking at 7.8 per cent in 2002/03.

The exchange rate is forecast to climb gradually over the next three years, peaking at 62 on the trade-weighted index in 2003, which is 20 per cent higher than it is now.

Budget 2000 feature

Minister's budget statement

Budget speech