“Strong economy stalling for lack of direction"

“Strong economy stalling for lack of direction”, say BERL forecasters

BERL forecasters suggest that economic mismanagement has choked out a perfectly sound period of growth and we are in for two to three years of a stalled economy, or at least a period with growth a lot lower than it should be.

“Vision and direction (which is really strategic governance), is lacking from most of the important economic areas. Sovereign debt is now down below the target of 30% of GDP, and projected to go much lower and so the conditions are right for Government to invest in their vision. The question is – where is the vision?” said BERL director Kel Sanderson. “If the vision is for a really strong economy around the regions, the vision would probably include investment in transport infrastructure. To do this needs new regional development objectives for transport, and not just investment criteria based on travel time savings and accident reduction.” he said.

Kel stated that “the other area where short-term management decisions may stifle New Zealand’s present growth and our long term strategic position is in population and migration. Many people hold the reasoned opinion that New Zealand would be the stronger with a population of seven to eight million people.”

“Businesses are maintaining a ‘wait and see’ approach to investment and employment intentions”, commented BERL Forecasts Editor Dr Ganesh Nana. “The short end of the yield curve has moved significantly negative and the long-end of the curve also has a distinct flat, if not negative, slope. Expectations of further easing in monetary policy are thus well established. We expect a reduction of the OCR to 5.0 percent in July and then falling again by another 25 basis points later in the year.”

THE PICTURE - JUNE 2003

Yet again our economic mismanagement has choked out a perfectly sound period of growth and we are in for two or three years of a stalled economy, or at least a period with growth a lot lower than it should be. This time the hit on the tradable sector by the uncompetitive exchange rate is being amplified by our dysfunctional electricity market and electricity industry. The tradable sector has lost over 22,000 jobs in the last year, or 5% of their employment.

However, on the global perspective we remain positive on the grounds that the normal cyclical trough has passed and that global authorities are taking appropriate action. Reinforcing this tentative optimism is the recent recovery in equity price indices suggesting some bolstering of investor confidence.

For New Zealand specifically, our optimism is now a lot more guarded. Immigration continues to provide a stimulus to offset other negatives. At this point in time we are comfortable with forecasting a relatively short period of flat economic activity, over the coming months.

But, as argued in our Feature, the downturn in the tradable sector - coupled with the lack of direction in key policy areas - signals to us that the challenges ahead do not just revolve around short-term monetary management.

Fiscal management has ‘achieved’ its objectives (government debt is already well below the 30% of GDP target, and is projected to fall even further). Hence, are there sensible reasons for pursuing continued ‘over-achievement’? Or, are there considerable negatives in such a policy? No doubt, a similar question should also be directed at our monetary management.

As to the short-term, confidence surveys continue to show little optimism. Businesses are maintaining a ‘wait-and-see’ approach to investment and employment intentions. The short-end of the yield curve however has moved significantly negative and the long-end of the curve also has a distinct flat if not negative slope. Expectations of further easing in monetary policy are thus well established and we expect a reduction of the OCR to 5.0% in July and then falling again by another 25 points later in the year.

As to exchange rates, given the already lacklustre European economy, we don’t see European countries standing aside and watching an inexorable rise in the Euro against the Greenback. Hence we still view the medium-to-longer term prospects for the €/US$ being nearer US$1.10. Consequently, we expect a gradual easing on the cross-rates - with the Kiwi heading to US$0.55 over the coming 12 months.

© Scoop Media