NZ economy grows while offshore risks linger

Thursday, 22 July 2010, 2:42 pm
Press Release: ASB Bank

NZ economy grows while offshore risks linger

• New Zealand’s recovery continues, though offshore risks have deepened
• New Zealand growth will be increasingly export driven
• The next economic cycle will see households live within their means

Economies around the world are rebounding from the recession, though the risks of a setback have increased, according to the latest ASB Quarterly Economic Forecast.

ASB Chief Economist Nick Tuffley says large and rapidly-growing European government debts have created considerable caution about exposures to European debt – similar to the wariness shown three years ago before the sub-prime mortgage debt flared up.

“The escalation of the crisis in Europe, which began in Greece, has flowed through into rising risk premiums between banks in global markets to a similar degree seen during the early stages of the sub-prime mortgage crisis,” Mr Tuffley says. “There is also some nervousness elsewhere in the world, namely around the US housing market now that it has lost some Federal support, and over China’s efforts to rein in its rampant economy.”

“A lot of global headlines in recent months have been negative. Nonetheless, global economic growth over the next couple of years is still expected to be strong - thanks to a number of quiet achievers that haven’t been as prominent in the news. The healthy economies in the Asia-Pacific are making up for weakness in Europe,” he says

Households pay price of boom times

ASB economists forecast the pace of the rebound in New Zealand will remain moderate compared to both the severity of the recession and compared to the rebounds following the past two recessions in the early 1990s and in 1998.

“The next economic cycle is likely to be a reverse of the last one. Households will spend within their means and a disproportionate contribution to economic growth will come from export-focussed sectors,” Mr Tuffley says. “The role that households will play in driving economic momentum will be modest.”

Exporters will lead the rebound

The recovery is likely to remain export-led, propped up by strong demand from key trading partners including Australia and China, and a low New Zealand dollar relative to Australia’s currency.

“Asia’s long-term prospects are healthy and trade flows to this region will continue growing rapidly. Eight out of ten of our top export destinations for goods are Asia-Pacific countries, and Australia and Asia take nearly 60 percent of New Zealand’s exported goods”, Mr Tuffley says.

With local recovery underway for more than a year, New Zealand is transitioning away from strong stimulus support. Mr Tuffley says fiscal policy will remain modestly stimulatory in the short term before the Government works to reign in its build-up of debt. “As a substantially indebted nation New Zealand needs to work hard at maintaining investor confidence – as well as buttressing its defences to deal with any future shocks”, Mr Tuffley says.

The OCR has now started to increase, and it is expected to steadily rise over the next year. “Even as the OCR rises, short-term interest rates will still be on the stimulatory side into 2011. However with global risks such as the European debt crisis looming large, there is always the possibility the RBNZ may pause the OCR increases over the next year or two,” he says.

ENDS

© Scoop Media

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