Molesworth & Featherston (Weekend) – March 10 2006

Direct Link To This Week's Weekend Update Edition:
http://img.scoop.co.nz/media/pdfs/0603/MandF10Mar06L.pdf

Economy
Slower say the mandarins

Treasury in its monthly update to finance ministers has tipped growth to come in weaker in the December quarter than the 0.7 per cent it was predicting at the time of the half-yearly update. Officials informed the Beehive the labour market is easing but remains tight by historical standards and is adding to wage pressure.

Household confidence has been high relative to the mood of business but is easing significantly, contributing to a further softening in the housing market.

The high New Zealand dollar has been an additional source of pressures on many exporters, especially manufacturers, but falls later in the week to around US65 cents should ameliorate Treasury’s concerns.

Of concern are signals businesses are planning to cut back investment at a time when capacity constraints suggest that - at least for inflation-busting - more capacity is needed. The annual trade deficit for the year to January of $7.1 billion was the highest as a percentage of exports since 1976. Further falls in the currency will widen the trade deficit in the short term before the extra competitiveness it brings to exporters ultimately narrows the current account gap.

The Reserve Bank agrees the economy is slowing, but in deciding this week to hold interest rates at their current level Governor Alan Bollard said household spending has only recently started to wane. “Over the next two years, we expect overall growth to remain subdued while a major rebalancing takes place, with a recovery in net exports as domestic demand weakens.”

The Bank expects the dollar to fall more but it saying interest rates won’t fall faster this year unless the economy slows faster than it's picking - which leaves the door to earlier interest rates cut wide open, since the RBNZ has steamier forecasts for the underlying health of the economy than virtually everyone else. Our inflation rate - 3.2 percent for the year to December, is only just above the OECD average of 3.0 percent, according to figures out this week. But once Turkey's ten percent inflation rate is removed from that, we tick up towards the top end of developed countries.

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