Molesworth & Featherston (Weekend) – Sept. 10 2006

Direct Link To This Week's Weekend Update Edition:
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Economy
Mild side

The economy has been doing better than expected, Treasury has told ministers in its latest monthly economic update. But the figures are still modest - Treasury says growth in the year to March 2007 will come in at around 1.5 percent, only a tick better than the one percent growth forecast in the Budget.

Better news is in the composition of the improvement. Treasury expects the current account deficit in the current three months (July-September) to be much reduced from its horrendous levels because dairy exports are up strongly. This was an improvement Treasury expected would come later this year. Meanwhile, imports are weak. Expect the economy to grow half a percent in this three months, and possibly more. The current slowdown “appears to be relatively mild compared with New Zealand’s historical experience,” Treasury concludes.

Meanwhile forecasters at the NZ Institute of Economic Research say growth will reach its low point in the year to next March and won't pick up much the year after. The forecast has improved compared to its last pick, in June, although NZIER now thinks we’ll do worse next year than it had previously believed. It thinks the labour market is slowing and unemployment will increase to five percent of the labour force over the next two years.

On the other hand Westpac thinks manufacturers could be in for a pleasant surprise. While manufacturers are glum about falling profitability as a result weak domestic demand, strong international competition and rising costs, there are some positive balancing sweeteners: The lower dollar and reasonable world economic growth.

Westpac says manufacturing profit margins are closely related to the value of our dollar relative to the Aussie dollar - and since our dollar is down on the Australian, profit margins are likely to be getting better.

“One gets the feeling that manufacturers are in for a pleasant surprise - with margins turning out to be higher than currently expected,” Westpac concludes.

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Direct Link To This Week's Weekend Update Edition:
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