Too soon to break out the bubbly: NZIER

By Brian Fallow

WELLINGTON - While there are clear signs the economy is starting to recover, it is too soon to pop open the champagne, says the New Zealand Institute of Economic Research.

Though 1999 started with a hiss and a roar, with a raft of indicators improving, the euphoria evident in business confidence surveys is premature, NZIER says in its latest quarterly predictions.

After a 0.2 per cent contraction in gross domestic product in the March year just ending, it sees growth picking up slowly to 2.8 per cent in the year ahead and peaking at 4 per cent the following year.

All the key drivers of growth - exports, investment and consumer demand - are improving, but only modestly, NZIER says.

It sees a pick-up in exports (including tourism) aided by further weakness in the currency, but outpaced by a surge in imports so that net exports make a negative contribution to GDP growth over the next four years.

Investment is forecast to increase, but it is a relatively weak pick-up reflecting the fact that business investment held up surprisingly well through last year's recession, NZIER director Alex Sundakov said. Residential investment is expected to turn around only slowly, reflecting net emigration and demographic changes.

Helped by tax cuts and the AMP share giveaway, household consumption held up surprisingly well last year, but NZIER forecasts consumption growth will slow.

One reason is weakness in the labour markets; another is its expectation that house prices will rise only slowly. The third factor is that households face debt servicing costs at historically high levels.

NZIER says the household savings rate entered negative territory last year.

"That net dis-saving cannot continue indefinitely," Mr Sundakov said. "Either incomes go up or spending comes down."

The institute expects the dollar to weaken slightly in the short term - they have it at 51USc this time next year - reflecting the fragility of the economic recovery and continuing concerns about the current account deficit.

The Reserve Bank is not expected to tighten monetary policy until towards the end of 1999, with 90-day wholesale rates, currently 4.7 per cent, climbing to 7 per cent by March next year.

The NZIER sees tentative signs commodity prices may be turning around, with oil prices on the rise again. With inflationary pressures emerging on a number of fronts it would be difficult for the Reserve Bank not to respond, Mr Sundakov said.