BERL forecasts cyclical slowdown

BERL forecasts cyclical slowdown, but risks of negative scenario cannot be discounted

While New Zealand’s economic growth for the next couple of years will be slower than in recent times it is set to remain positive, according to BERL’s latest assessment of the situation and prospects for the New Zealand economy.

However, in a presentation today BERL Chief Economist Dr Ganesh Nana was at pains to stress there are several risks that carry sufficient weight to knock the economy into a potentially more damaging downturn.

“It is important that we (policy officials, businesses and commentators) do not get too excited over recent data. We knew commodity prices were going to adjust downwards, we knew the exchange rate was way overvalued for a long time, and we knew the Christchurch re-build was going to peak. Now these things are happening there is an adjustment occurring. We shouldn’t be too surprised by this.”

“The adjustment had to happen, but there is more to come. Both the OCR and the exchange rate will have to come down further, and it is important that officials don’t get distracted from this path”, commented Dr Nana.

Factors helping to maintain positive growth were strong migration inflows as well as infrastructure and new house building activity. Also featuring is stimulus from the wider export sector as the NZ$ exchange rate adjusts to a more sustainable level, and this is expected to cushion the dairy decline.

Risks that have the potential to derail the slowdown into one of more substantive concern include

• confidence rapidly turns dark – causing sentiment to impact on investment and employment and also potentially slowing the stimulus from the migration inflow

• the RB getting cold feet from seeing ghosts from inflation past and so not reducing the OCR – this risks stalling the necessary NZ$ exchange rate adjustment

• renewed global uncertainty – this pushes the commodity price scenario to an even bleaker story

• banks’ taking a more aggressive stance to mitigate their exposure to the agriculture sector

In conclusion, Dr Nana notes “the longer-term structural imbalances in the New Zealand economy remain, including a persistent external deficit and a tradable sector continuing to be hamstrung by policy settings driven by short-term cycles. This cyclical downturn will likely exacerbate these.”

ENDS

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