NZ Recovery Goes On As Economies Regain Stability

Monday, 19 April 2010, 12:16 pm
Press Release: ASB Bank

ASB Quarterly Economic Forecast

NZ Recovery Continues As Global Economies Regain Independence

• NZ continues to pick up pace while most countries are back on the road to recovery.
• Global focus on developing exit strategies from huge fiscal and monetary stimuli.
• RBNZ hikes likely from June, though Budget 2010 may influence timing.

New Zealand’s economic bounce-back continues to gain momentum as we join most countries on the road to recovery, according to the latest ASB Quarterly Economic Forecast.

ASB Chief Economist Nick Tuffley says New Zealand’s economic prospects for 2010 look reasonable, with the economy having been out of recession for a year. “The fundamentals for a self-sustaining economy are now locking in place, and business confidence has recovered. The growth figures for the final quarter of 2010 show an increase in capital expenditure on plant and machinery, an indication that businesses are increasingly looking to the future rather than the trials of the recent past,” he says.

This recovery is expected to continue, the progressive rebound of recession-battered industries eventually nudging annual growth over 3%. However, given the extent of the recession, the pace of rebound is expected to be comparatively soft by historical standards.

Mr Tuffley says that households are taking on less debt and saving more. Consequently, the drivers of future growth will be less based on consumer spending, as many households concentrate instead on living within their means.

“Rather than a ‘feel good’ recovery, it will probably be a ‘feel less bad’ recovery, from an individual point of view,” he says. “However the economic bounce-back is not all one-way, with clouds gathering over the housing market as property investors face potential tax changes.”

Globally the recovery is also gaining momentum, with Asia the liveliest region economically. “Countries are now starting to move from crisis response to recovery mode,” Mr Tuffley says. “The theme for the next couple of years will be how to exit from the unprecedented – but unsustainable – fiscal and monetary stimuli that staved off a global meltdown.”

Dealing with fiscal policy has urgency in some countries – Greece being the most high-profile example. “Fortunately, New Zealand is better placed than many countries, even though rating agencies have assessed that there is a greater degree of fiscal vulnerability here in recent years,” he says. “The extent of local debt has brought a strong focus in New Zealand on how to get value for money from Government spending, as well as on ways to promote faster economic growth.”

June remains the likely timing for the first hike by the RBNZ to move interest rates back to more normal levels. “Despite the extent of the recession, inflation pressures mean the RBNZ will need to begin the tightening cycle soon. We expect the RBNZ will start increasing the OCR in June, moving to an eventual peak of 5% in gradual 25bp increments,” he says. Factors such as Budget 2010, including details of the recently proposed tax policy changes for property investors could dampen the housing market, affecting economic activity and the timing of the OCR increases.

ASB Quarterly Economic Report

ENDS

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