Exploit Opportunity To ‘Give Growth A Chance’

“Next Government Must Exploit Opportunity To ‘Give Growth A Chance’ ”, Say BERL Forecasters

Installing a growth-friendly inflation target and policy environment must be the priority for any new government.

“Three consecutive years of solid employment growth, the stimulus from robust (though now slowing) migration inflows, a competitive (though now less so) exchange rate, sound government accounts, regional development initiatives, benign (with maybe a risk of rising) inflation and a return to global growth all combine to provide policy-makers with a window of opportunity to ‘give growth a chance’,” according to the latest assessment of NZ’s economic prospects from independent forecasters BERL. The need to appoint a new RB Governor and the traditional post-election honeymoon period may well enhance the opportunity to install a growth-friendly inflation target and policy environment.

Noting that interest rate hikes of another 125-points over the coming 6 to 9 months - as signalled in last month’s Monetary Policy Statement - “... would represent an extremely severe monetary tightening over a relatively short period of time”, BERL suggest it would be foolish indeed to miss such a window of opportunity. The BERL economists were particularly concerned about the impact on investment and business confidence of the monetary authority’s focus on keeping activity within ‘capacity-constraints’. As BERL Forecasts Editor, Ganesh Nana explained,

“If the key objectives of economic management are to achieve economic growth, increased per-capita income and so standards of living, then investment to increase capacity and improve productivity needs to be whole-heartedly encouraged. The management of monetary policy, however, is targeted at reducing the possibility of significant periods of 'above-capacity' levels of activity. This approach removes one of the main stimuli to investing in capacity expansion and productivity improvements, that is the prospect of sustained buoyant profitability growth”.

BERL forecasts interest rates to peak in mid-2003 with the cash rate at 6.25%. But noting the monetary view that GDP growth above 3% pa would be inflationary, BERL expects overall GDP growth close to its perceived maximum of 3% pa through the forecast horizon. The contribution from the domestic sector - consumption and investment spending - is predominant. Stronger export growth re-emerges towards the latter-half of calendar 2003, as current short-term exchange rate pressures subside - with the US$ stabilising near 118 Yen and the Euro near 94 US cents - leading to the Kiwi staying below 50 US cents over the medium-to-longer term.

© Scoop Media