Eurozone risks ease, but high NZ dollar a challenge

Tuesday, 30 October 2012, 11:13 am
Press Release: ASB Bank

UNDER EMBARGO UNTIL 0100 30 October 2012

Eurozone risks ease, but high NZ dollar a challenge

• Eurozone risks ease, but global uncertainties and vulnerabilities remain.
• Canterbury rebuild and low interest rates to drive a gradual New Zealand recovery.
• No easy answers for addressing the high NZ dollar.

The new RBNZ Governor will have plenty of juggling to do according to ASB’s latest Quarterly Economic Forecast. Ongoing global risks will need to be weighed against gradual improvement in domestic spending, in an environment where low interest rates are encouraging a recovery in borrowing demand.

ASB Chief Economist Nick Tuffley: “In the Eurozone, some of the extreme risks of financial dysfunction have been reduced. Solving the crisis still needs politicians to make good and timely decisions, and progress is taking time.”

“The Eurozone economy shows no sign that its mild recession is easing. In addition, the US still has to skirt its impending “fiscal cliff” after the upcoming presidential election, which could bring a few white-knuckle moments.”
Domestically, Canterbury’s earthquake reconstruction is getting underway, though Mr Tuffley notes the pick-up has been uneven at times.

“Amidst conditions of ongoing global risks and a high NZ dollar, an environment of sustained low interest rates will continue to provide support to domestic spending. However, the housing market in Auckland is continuing to heat up and runs an increasing chance that sizable price increases will spark wealth-related spending.”

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“The side effect of the NZ economy being in much better shape, relatively, than countries such as the US and UK, is a high exchange rate. The issue is can much be done about alleviating this pressure? Weighing up feasible options, some of the costs appear considerable, such as higher import costs if the NZ dollar fell or a greater likelihood of boom/bust housing and capital investment cycles.”

Mr Tuffley says that a government policy focus on improving productivity growth and the ease of doing business would help mitigate the impact of the NZ dollar on affected businesses.
ENDS
The embargoed report is attached. Embargoed_ASB_Quarterly_Economic_Forecast__October_2012_FINAL.pdf

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