Econ. Outlook: From Sprint Star To Marathon Runner

WestpacTrust is the New Zealand division of Westpac Banking Corporation, which is incorporated in New South Wales, Australia

8 September 2000

THE ECONOMIC OUTLOOK: FROM SPRINT STAR TO MARATHON RUNNER

WestpacTrust’s economics team expects the New Zealand economy to remain competitive over the next couple of years, but to struggle to make it to any international medal podium. They also note that the New Zealand economy has switched events, from a sprint star of the mid-1990s to a more sedate marathon runner. This comes in WestpacTrust’s September quarter Economic Overview.

WestpacTrust expects GDP growth to average around 3%-3.5% per annum for the next couple of years, close to its sustainable level. “Growth at these levels will imply only modest pressure on domestic inflation and a reduction in the current account deficit,” said Adrian Orr, WestpacTrust’s Chief Economist. “This is a very different growth scenario to that of the 1990s, when the economy bolted from the blocks, but eventually hit the inflation and current account deficit growth barriers.”

Rising household debt, as reflected in the current account deficit, is one reason for a more sedate expansion. “The next 12 to 24 months is likely to be a period of consolidation for New Zealand households, with consumption growth only likely to match income growth at best,” said Mr Orr.

With New Zealand opting for the marathon race, Mr Orr said that investor interest is likely to continue to struggle. “Investors, both domestic and foreign, have the luxury of backing the best international sprinters, with the US perceived as a winner at present. The entry tickets to New Zealand’s marathon are thus likely to be sold at bargain prices.

“The NZD is expected to appreciate modestly from early 2001, but struggle to reach anywhere near its cyclical peak of the 1990s. This means New Zealand exporters are looking at a sustained period of improved earnings, as long as domestic costs remain constrained. In addition, between now and the end of the year the NZD will remain handcuffed until several factors line up. The key factors include slower US growth and confirmation of a turnaround in New Zealand’s current account deficit,” said Mr Orr.

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With investors looking elsewhere, New Zealanders will increasingly rely on their own savings to fund investment and consumption. This implies a floor on New Zealand’s longer-term interest rates. In addition, with activity expected to operate at or near capacity over the next couple of years, modest upward pressure remains on short-term interest rates. WestpacTrust expects a further rise in the Official Cash Rate later this year and/or early next year. However, the cyclical peak in interest rates will remain well below those of the mid-1990s.

“Like most recoveries, economic fortunes will be a mixed bag across the various sectors of the economy. The recent data indicates that domestic growth has cooled off, but the export sector continues to go for gold,” said WestpacTrust Economics. “We are thus likely to see unemployment emerge in some sectors, and capacity constraints in others. If resources struggle to shift to where demand is strongest, then inflation pressures will emerge.”

ENDS

For further information please contact:

Adrian Orr Donna Purdue
email: adrian_orr@westpac.co.nz email: donna_purdue@westpac.co.nz

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