Magazine article New Zealand Management

Planned Optimism

Magazine article New Zealand Management

Planned Optimism

Article excerpt

A prosperous new year? Don't ask our columnist. He is neither a soothsayer nor a forecaster. But he is willing to consult people who are trained to tinker with econometric models and tell us how the economy should shape up over the next 12 months or so.

The New Zealand Institute of Economic Research's latest quarterly NZIER Consensus Forecasts, in fact, enable your columnist to tap into the distilled wisdom of 11 forecasting organisations, including the Reserve Bank and Treasury. The Consensus Forecasts are an average of New Zealand economic forecasts compiled from a survey of financial and economic agencies. They show real GDP growth of 2.5 percent is expected in the year to March 2006. Annual growth is expected to soften further through the following year, down to 1.9 percent.

Key drivers of these forecasts are meagre growth in New Zealand's exports and increased interest rates putting the brakes on domestic demand.

Further out, a rebound in export growth in 2007/08 is expected to provide a boost to economic growth, with GDP growth rising to 2.8 percent in the year to March 2008.

Persistently strong domestic demand in the past 12 months, along with a tight labour market and rising wage costs, suggest inflationary pressure will persist. Forecasters expect a 3.4 percent annual increase in the CPI in the year to March 2006.

Pricing pressures are expected to ease gradually but remain historically high, with annual CPI increases of 2.8 percent in 2006/07 and 2.6 percent in 2007/08.

Interest rates--90-day bank bill rates, for the purposes of these forecasts--are expected to average seven percent in 2006/07, down slightly from a forecast of 7.3 percent for 2005/06.

Forecasters expect the Kiwi dollar to depreciate (on a trade weighted basis) in the next two years as New Zealand interest rates ease and economic growth slows. The TWI is expected to decline to annual averages of 64.8 and 60.3 in 2006/07 and 2007/08, respectively. As the institute explained, this will bring welcome relief to exporters, who have been facing post-float record high exchange rates. Exports are expected to decline by 0.2 percent in 2005/06. Thereafter the softening value of the Kiwi dollar will help boost export growth. Exports are forecast to grow 3.3 percent and 4.3 percent in 2006/07 and 2007/08 respectively.

Despite the expectation of weaker growth, the labour market is forecast to remain buoyant and wages to continue to rise, thanks to continued shortages of staff and pent-up demand for labour. …

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