ECONOMICS Planned Optimism

A prosperous new year? Don’t ask your columnist. He is neither soothsayer nor forecaster. But he is willing to consult people who are trained to tinker with econometric models and tell us how the economy should shape up over the next 12 months or so.
The New Zealand Institute of Economic Research’s latest quarterly NZIER Consensus Forecasts, in fact, enable your columnist to tap into the distilled wisdom of 11 forecasting organisations, including the Reserve Bank and Treasury. The Consensus Forecasts are an average of New Zealand economic forecasts compiled from survey of financial and economic agencies. They show real GDP growth of 2.5 percent is expected in the year to March 2006. Annual growth is expected to soften further through the following year, down to 1.9 percent.
Key drivers of these forecasts are meagre growth in New Zealand’s exports and increased interest rates putting the brakes on domestic demand.
Further out, rebound in export growth in 2007/08 is expected to provide boost to economic growth, with GDP growth rising to 2.8 percent in the year to March 2008.
Persistently strong domestic demand in the past 12 months, along with tight labour market and rising wage costs, suggest inflationary pressure will persist. Forecasters expect 3.4 percent annual increase in the CPI in the year to March 2006.
Pricing pressures are expected to ease gradually but remain historically high, with annual CPI increases of 2.8 percent in 2006/07 and 2.6 percent in 2007/08.
Interest rates – 90-day bank bill rates, for the purposes of these forecasts – are expected to average seven percent in 2006/07, down slightly from forecast of 7.3 percent for 2005/06.
Forecasters expect the Kiwi dollar to depreciate (on trade weighted basis) in the next two years as New Zealand interest rates ease and economic growth slows. The TWI is expected to decline to annual averages of 64.8 and 60.3 in 2006/07 and 2007/08, respectively. As the institute explained, this will bring welcome relief to exporters, who have been facing post-float record high exchange rates. Exports are expected to decline by 0.2 percent in 2005/06. Thereafter the softening value of the Kiwi dollar will help boost export growth. Exports are forecast to grow 3.3 percent and 4.3 percent in 2006/07 and 2007/08 respectively.
Despite the expectation of weaker growth, the labour market is forecast to remain buoyant and wages to continue to rise, thanks to continued shortages of staff and pent-up demand for labour. The average hourly private sector wage rate is forecast to rise by 4.1 percent in 2005/06, followed by 3.8 percent in 2006/07. The unemployment rate is expected to rise slightly from 3.7 percent in 2005/06 to 4.1 percent in 2006/07.
But there are big differences in outlook among the agencies whose forecasts have been averaged for the Consensus Forecasts. The NZIER, for example, forecasts economic growth to slow, from 3.6 percent in the March 2005 year to 2.3 percent in the March 2006 year. Annual growth will trough in the March 2007 year at 0.9 percent and then is expected to rebound to 2.9 percent in the year to March 2010.
The NZIER notes that businesses are increasingly reporting slowing levels of activity, as export returns are soft, costs are increasing and domestic demand is beginning to ease on the back of two years of rising interest rates. Investment is forecast to begin to slow in mid-2006 as imported capital equipment prices start to turn up on the back of gradual depreciation of the Kiwi dollar, and businesses tighten their belts in the face of slower profit growth. Housing investment is forecast to decline as higher interest rates bite and household appetites for increasing levels of indebtedness wane. Consumption growth is expected to ease as import prices rise, households seek to reduce their debt servicing costs, and income and wealth growth soften.
BERL sees things differently and, despite the microscope being placed in recent weeks on the numerous negatives facing the country’s economic prospects, says the positives continue to outweigh the negatives. BERL senior economist Ganesh Nana did concede “the gap between them is narrowing” but was dismissive of reports of an imminent “hard landing” or even recession.
BERL has revised down its GDP growth forecasts as tightening monetary policies bite, signs of patchy employment growth appear, tourism activity eases, the pattern of non-residential consents becomes murky and business confidence worsens. Even so, it is forecasting GDP growth to ease down to 2.6 percent in 2005/06, increasing to 2.8 percent for the year to March 2007, followed by 3.3 percent growth in the year to March 2008.
Which scenario is correct? It’s uplifting to kick off the new year on the more optimistic note.

• Bob Edlin is regular contributor to Management.

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