Looking into the crystal ball: A forecast and some risks

28 January 2011

Reserve Bank Governor Alan Bollard today said the recovery is expected to pick up, but a wide range of scenarios could impact upon the economy in the year ahead.

Speaking to the Canterbury Employers’ Chamber of Commerce this afternoon, Dr Bollard said the behaviour of people and businesses had changed significantly since the Global Financial Crisis, making economic forecasting particularly difficult.

“We have little from history to guide us about how enduring or deep these changes may be In addition, the recovery has been rocky and fragile,” he said.

Dr Bollard described the Global Financial Crisis as “a deep and damaging event”.

“Even in New Zealand where we have been less affected, recovery has been slow and patchy. In fact 2010 was a disappointing year: we initially saw recovery happening, but the second half went unexpectedly soft (as it did in many OECD countries). During 2011 we expect the recovery to pick up and gradually become more secure.”

Dr Bollard said several international dynamics could impact on people and businesses in the year ahead, including further economic “gloom” in the US. However, it was just as possible the US could surprise us with economic strength in 2011, he said.

“In this scenario, the US dollar would presumably appreciate, taking some pressure off the New Zealand dollar and providing an improved opportunity to rebalance our economy towards export growth,” Dr Bollard said.

Other international risks included sovereign debt reaching crisis point, emerging markets over-heating and an intensification of the commodity boom.

“New Zealand farmers are still recovering from the last commodity boom when some over-committed, and are still looking to reduce the debt they built up. A more measured reaction this time is important,” Dr Bollard said.

However, he believed New Zealand was well placed to benefit from some of these changes through 2011, but warned a continued escalation of oil prices would cause world growth to suffer again, as well as adding inflationary pressure globally.

Closer to home, Dr Bollard said domestic risks with the potential to derail the Bank’s forecasts included further fragility in the financial markets and New Zealanders continuing to save and not spend – beyond what might be expected after a marked recession.

“This would cast a pall of gloom over the market, with homeowners keeping houses off the market, not re-building and trying to pay off mortgages faster, saving more, and spending less. The construction and retail sectors would suffer as a result,” Dr Bollard said.

However, the positive side of this was an acceleration of New Zealand’s much discussed rebalancing, reducing the current account deficit, improving competitiveness, reducing exchange rate pressure, relieving pressure on funding markets, and reducing our external vulnerability generally.

Dr Bollard said a potential positive factor for New Zealand businesses was a construction boom, driven by reconstruction following the Christchurch earthquake and relatively strong inward migration.

The Rugby World Cup also had the potential to affect forecasts in a positive way.

“We think the event will add about $700 million to the New Zealand economy over the six weeks of the event, contributing approximately a third of a percent to GDP. More optimistic assumptions about multiplier effects would suggest a stronger impact, during months which are normally a tourist down-time,” Dr Bollard said.

You can read the full speech at the following link:
http://www.rbnz.govt.nz/speeches/4294400.html.

ENDS

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