GDP figures provide a warning for the economy.

Canterbury Manufacturers’ Association

29 September 2006.

GDP figures provide a warning for the economy.

The Canterbury Manufacturers’ Association says that although the latest GDP figures show a slight improvement for the June Quarter, further growth in the New Zealand economy could be undermined if fiscal and monetary policies remain at conflicting settings.

The Association says that although recent weeks have seen the reduction of some inflationary pressures (international oil prices) and exports have lifted in the recent quarter, an ever-burgeoning government sector spend may still push the Reserve Bank into tightening mode, driving up the exchange rate and killing any hope of an export led improvement in the current account deficit.

“The figures for the June quarter tend to indicate that with realistic exchange rates the export sector will begin to perform”, says CEO John Walley. “However, our concern is that the Government has to contest an election in just over two years and has a large surplus at its disposal. There may be a strong temptation to roll out the chequebook and inject money into non-productive sectors of the economy. That might bring a short term political benefit but it will drive economic imbalances, exacerbate inflationary pressures further and create severe difficulties for those in the export sector, particularly those dependent on elaborate transformation.

Mr. Walley says that the New Zealand economy is in a vicious cycle whereby any growth that the exporting sector has anticipated or experienced recently will be lost as the dollar strengthens on the back of high interest rates”.

“Perhaps the Reserve Bank could have done more to keep the dollar within a manageable price range. However, this debate aside, we still have severe imbalances in the economy that are not being addressed by wider Government policy” says Mr. Walley. Offshore investors will not be put off buying the Kiwi dollar simply because of Michael Cullen’s recent comments and as a consequence, the dollar will continue to track upwards and that will see the end of any export-led recovery.”

Mr. Walley says that the Government needs to implement policies which encourage and provide incentives for new product-focused exporters, even if it is tempted to inject money into other sectors as the next election looms. The consequences of such an approach should be obvious for New Zealand at this stage.

“The Government needs to look at the long term implications of its actions in improving our GDP growth rate and redressing the economic imbalances driving the current account blow-out. It needs to develop a cohesive approach that reduces the public sector spend and does not support consumption leading to a reduction in inflationary pressure, a cut in interest rates and downwards pressure on the currency which will support future export growth.”

ENDS

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