Brash bullish on outlook

By PATRICIA HERBERT
economics editor

The New Zealand economy has hit the bottom and is beginning to bounce back, but the recovery will be slower than in 1991, says the Reserve Bank.

The bank's Governor, Dr Don Brash, says the possibility of a "serious global recession" still cannot be ruled out completely.

Despite positive developments internationally over past weeks, "at this stage we are not yet inclined to take these glimmers of light ... as the beginning of a bright new day."

The strongest "glimmer" on the horizon yesterday came from interest rate cuts both in the United States and in New Zealand.

The local 90-day bill rate, the benchmark banks use to fix their floating mortgage rates, fell to an all-time low on the back of a further substantial easing of monetary policy by Dr Brash.

It broke through the previous 25-year low of 4.35 per cent to 4.25 per cent.

Bank economists were predicting retail interest rates, including mortgages, to fall.

The director of the Centre for Banking Studies at Massey University, David Tripe, said that if the 90-day rate stayed low for a week, a general downturn should follow in all other interest rates.

The fall in the US was led by the chairman of the Federal Reserve, Alan Greenspan. He cut the overnight bank loans rate for the third time in seven weeks - trimming it 0.25 of a percentage point to 4.75 per cent.

But lower interest rates are good news only for borrowers.
For net lenders, they represent a loss in income. And it is important to remember that they are a monetary policy response to economic weakness rather than to economic strength.

Further evidence of the huge uncertainties in the world economy came yesterday in a sobering report from the Organisation for Economic Cooperation and Development.

The Paris-based think tank cut its growth forecast for member countries from around 2.5 per cent in the next two years to 2.2 per cent and 1.7 per cent.

Even more ominous was that it underlined the risks surrounding its forecasts by attaching to them a weaker growth scenario. This is normal Treasury practice here but the OECD has never done it before.

The OECD's outlook for New Zealand is cautious, but fairly encouraging. It is expecting this year to be flat but is projecting growth of 2 per cent in 1999, rising to 3.4 per cent in 2000.

But it warns that these figures are subject to significant downside risk due to New Zealand's exposure to the troubled Asian economies and to its high external indebtedness. While comparisons between the two sets of forecasts are complicated by the Reserve Bank's using a March year and the OECD a calendar year, the growth profiles are similar.

Manufacturers Federation spokesman Peter Crawford said Dr Brash's economic outlook was "not gloomy - realistic."
Members had confidence the economy was growing, but only slowly.

He said the growth in real wages meant the country would recover much more slowly than it did in the early 1990s.

Council of Trade Unions economist Peter Harris said the Reserve Bank moves were no surprise - it was following the economy on its way down, then doing nothing to lead it out of recession.

Yesterday's move to ease monetary conditions was consistent with "an obsession with inflation, not the real economy. It would have little, if any impact on employment."