The New Zealand Institute of Economic Research (NZIER) is releasing the September Quarterly Predictions – a regular set
of forecasts and commentary on the New Zealand economy.
The detail is in the backgrounder on the next page, but in summary:
A combination of weak confidence and slowing consumer demand will see economic growth slow to 2.7% in 2000/01. Despite
this “flat patch”, the economy will experience a substantial rebound in 2001, as a strong export performance combines
with recovering confidence and a catch-up in deferred employment and investment. Growth rises to 3.9% in 2001/02.
Risks are still on the downside. Weak business confidence, vulnerable household balance sheets, rising inflation and
the persistent current account deficit could all undermine growth over the next few years. The current account deficit
presents the most overarching risk, with the potential to induce a sharper contraction in domestic activity if it
continues to put downward pressure on the exchange rate and upward pressure on interest rates.
“Flat patch” to dominate 2000
Developments in the last three months have been broadly in line with our June quarter forecasts. Most indicators point
to a softening in growth since the start of the year, with March GDP figures showing key components such as private
consumption, business investment and exports all slightly weaker than anticipated. Other activity indicators for the
June and September quarters suggest domestic demand has remained subdued despite a continued pick up in export growth.
Our forecasts have remained much the same as last quarter. The slump in confidence will continue to dampen activity in
the short term. Businesses will tend to postpone new employment and investment initiatives and households will cut back
on new spending in response to slower employment growth and their already precarious balance sheet positions. These
developments will be offset to some extent by a stronger external performance – export growth will continue to gather
momentum as import demand weakens. However, overall GDP growth will slow from 4.8% in 1999/2000 to 2.7% in 2000/01.
Annual average percent change
Source: Statistics New Zealand, NZIER forecasts
Despite the “flat patch” this year, the economy will experience a substantial rebound in 2001. The current upswing in
export growth will continue for some time yet. World demand is in a growth phase at the moment and will remain strong
over the next five years. Exports will also benefit in the short term from a very low exchange rate and the ongoing
expansion of agricultural production.
The flow on effects of this positive export situation will filter through into the broader economy over the next two
years. At the same time, some of the concerns surrounding government policy changes should ease, lifting confidence out
of its current slump. This will act as an important catalyst for growth, lifting employment, investment and eventually
consumption spending. Overall, the rebound will see growth rise to 3.9% in 2001/02.
From 2001 on the economy will move into a more conventional cycle. Export growth will slow as the upswing in
agricultural production ends and the exchange rate goes through a moderate appreciation. The slowdown will be
accompanied by weaker growth in investment spending. Although consumers will maintain reasonably steady spending growth,
this will be offset by stronger import growth. Economic growth will slow to 2.8% in 2002/03.
The risks are still heavily stacked on the downside. A sustained period of business pessimism, if it occurred, could see
firms remaining reluctant to increase employment and investment, with obvious negative consequences for domestic demand.
Likewise, the weakness of household’s financial positions could easily undermine growth. High debt levels, weak asset
growth and a persistently low savings rate have put households in a delicate financial position. A general switch
towards “belt-tightening” could see consumption spending slow more dramatically in the short term.
Inflation is another key downside risk. Rising oil prices and the lower dollar will generate substantial upward price
pressures over the next year. Despite indicating that it will “look through” any short term burst of inflation, the
Reserve Bank may find itself battling against stronger generalised inflation over the medium term. In particular, the
new Employment Relations Act – due to come into place in October – has the potential to further fuel inflation through
stronger wage pressures. Attempts to rein in any resulting inflation will tend to result in higher interest rates and
slower domestic demand.
However, the most pervasive and systemic risk still concerns New Zealand’s persistent current account deficit. Both
directly and indirectly, the deficit affects the exchange rate, interest rates, inflation, consumption, investment and
confidence. It now stands at 8.2% of GDP and has still not shown any convincing signs of turning around, despite recent
falls in the exchange rate. Although the lower New Zealand dollar has boosted our external income it’s had little impact
on our expenditure.
An improved export performance is essential for growth in the broader economy and rescuing the current account balance.
However, an improved savings performance is the key over the medium term. Only by lifting national savings can we
prevent current account problems from recurring and put growth on a sounder footing.
Yet savings behaviour is notoriously difficult to change. Particular attention needs to be given to ensuring that any
policy changes aimed at increasing savings do not simply result in one form of saving being substituted for another.