IMF more pessimistic than Treasury on NZ's economic growth

IMF more pessimistic than Treasury on NZ’s 2011 economic growth

By Paul McBeth

March 21 (BusinessDesk) – The International Monetary Fund is more pessimistic about New Zealand’s economic growth this year than the Treasury, picking an expansion of just 1% in 2011.

IMF mission chief to Australia and New Zealand Ray Brooks told reporters in Wellington the nation’s recovery stalled in the middle of last year, and the Christchurch quake will write off almost all expansion this calendar year.

That’s a third of IMF’s previous forecast for 2011, and half the Treasury’s expectation after last month’s 6.3 magnitude earthquake that wiped out as much as $15 billion of housing and infrastructure in the country’s second-biggest city. Growth will return to about 4% in 2012 when the rebuilding process begins, Brooks said.

“The growth outlook is quite uncertain at present because of the recovery that stalled since mid-2010, reflecting very soft domestic demand growth as households and businesses got very cautious around debt,” Brooks said. The impact of the earthquake creates considerable uncertainty around the outlook, particularly related to the timing and the size.”

That comes as local economists predict negligible growth over the next two March years, before accelerating in 2013, according to the New Zealand Institute of Economic Research’s consensus forecast released today.

Brooks said New Zealand’s fiscal deficit is forecast to reach 9% of gross domestic product as the government takes on more debt to drive Christchurch’s rebuild, though it was already facing a structural deficit equal to some 5% of the economy.

New Zealand’s public debt is relatively benign compared to other advanced economies, though Brooks said the government needs to return to surpluses as fast as possible to help drive a shift away from high national indebtedness that leaves the country vulnerable to an external shock.

“To keep debt low and meeting the target of 20% (of GDP) over the next 10 years, they need to start running strong surpluses in five or six years,” he said.

The government-mandated Savings Working Group’s suggestions to lift national savings had some solid ideas, and the IMF endorsed a flatter broader tax base to help improve productivity. Introducing a land and capital gains tax would be beneficial, as would another hike in goods and services tax, Brooks said.

The IMF endorses the government’s proposal to sell down a holding in some of its assets in a bid to reduce national debt, and Brooks said middle-class welfare packages, such as Working for Families and interest-free student loans were probably areas where fiscal spending could be tightened.

Yesterday, Prime Minister John Key indicated there will be no new spending in this year’s budget, outside of health and education, as it looks for ways to pay for the quake.

The combined cost of Canterbury’s two quakes is about $15 billion, $9 billion of which is in residential housing, Brooks said. About two-thirds of that cost will be picked up by reinsurers, and the Crown will be left covering some $6.5 billion. About half of that will be funded by the Earthquake Commission’s assets, he said.

Last week, Finance Minister Bill English flagged a budget deficit blow-out to 8% of GDP, with public debt forecast to peak above 30%. He had previously signalled some capital expenditure would be redirected to the rebuilding effort, and that the government will look very closely at clamping down on Working for Family payments at the higher end of the income scale.

(BusinessDesk)

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