RBNZ on hold as fragile recovery takes hold

NZ research note - RBNZ on hold as fragile recovery takes hold

• With further labour market deterioration, RBNZ to stay on hold through early 2010

• Upward revision to 2010 GDP growth follows upgrades to global growth

• But, strong NZD limiting export-led recovery as global demand rising

Following a slew of upward revisions to J.P. Morgan’s global GDP forecasts, we have pushed through upgrades to our New Zealand growth forecast for 2010. We now expect the economy to expand 2.7% next year (up from 2.3%), mainly owing to higher export volumes. The NZ upgrade follows significant upward revisions to growth forecasts in New Zealand’s major trading partners, including Australia, the largest trading partner.

We maintain our forecast, though, that the economy will contract 2.2% in 2009, with exports, consumption, and investment remaining weak. Investment will, by far, be the largest drag on near-term growth, falling 16% in 2009; this will have negative consequences for employment and private consumption, putting further pressure on firms. Investment should stabilize in 2010, though, as credit conditions ease.

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