World's woes weaken our growth hopes

By KEVIN HART

Weakened world growth prospects have dampened expectations for the NZ economy in the coming year.

A bleaker analysis of the outlook for our big trading partners, especially the US, has persuaded the Treasury to bite the bullet and rein in its economic growth projection for the March 2002 year to 2.6 per cent.

That is a sharp decline from the 3.7 per cent forecast in December.

Growth is expected to rebound to 3.3 per cent the following year, then dip to 3 per cent in 2004.

Forecasts for the next three years suggest annual growth of just under 3 per cent, which is where most estimates of New Zealand's sustainable non-inflationary growth rate lie.

The impact of weaker export demand, especially in the US and Japan, has been offset somewhat by domestic forces, such as the recent falls in interest rates.

But it has taken a toll on the Government's 2002 revenue and budget surplus projections.

Revenue is forecast to fall to $40 billion, from the $40.7 billion predicted in the December forecasts.

The projected surplus - the difference between expenses and revenue plus contributions from state companies - slips from $2.2 billion to $1.4 billion.

Weaker export demand is also likely to make employers reluctant to hire more workers or invest in new factories or Machinery.

And households are likely to be cautious about spending, slowing growth in domestic demand.

But slower growth this year, and the predicted rebound next year are not expected to produce major fluctuations in the unemployment rate. The Treasury expects firms now having difficulty finding skilled labour to be reluctant to shed workers they may need when activity picks up.

So the unemployment rate is expected to remain at about 5.5 per cent this year.

But the soggy domestic economy will relax inflationary pressures, especially as the impact of oil price rises and a falling exchange rate unwind.

An inflation rate of 2.3 per cent is forecast this year, dropping to 1.7 per cent in the March 2003 year.

That forecast may be challenged if the Treasury is being unduly pessimistic about domestic spending.

Recent export growth has left farmers with money in their pockets, the labour market is tight, and lower interest rates could revitalise the housing market.

This would be a shot in the arm for tax revenue, which is now expected to total $37.7 billion in the March 2002 year, down from the $38.3 billion forecast in December.

But slower economic growth will also limit the improvement in the current account deficit. As growth picks up in 2002, the deficit is projected to fall to 4.75 per cent from an estimated 5 per cent this year, and to drop gradually to 3.5 per cent in 2005.

Spending, a key indicator of fiscal prudence, is forecast to total 33.6 per cent of gross domestic product in 2002, dropping to 32.7 per cent by 2004.

The better times forecast for next year, including 3.3 per cent economic growth, hinge on a recovery in exports, along, to a lesser degree, with accelerated domestic spending.

That, in turn, will depend on the success of monetary policies in Washington, Tokyo and Canberra.

The Treasury is refreshingly frank in acknowledging that the timing and magnitude of the flow-through of events in those countries is far from clear.

www.nzherald.co.nz/budget

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