The economy crawls into 2011

Many economists were caught out with growth forecasts for 2010 which were based on previous rapid recoveries from downturns and which turned out to be too bullish. They are treading more cautiously in their outlook for 2011 and beyond. The average GDP forecast for the March 2011 year based on NZIER’s survey of 10 financial and economic agencies has been lowered from the previous September forecast of 2.8% to 2.1%, just under Treasury’s revised forecast of 2.2%. NZIER says economic data has been disappointing over the last quarter, which is reflected in the downward revision.

However, our economic soothsayers are more positive about the year to March 2012 with an average forecast rise in GDP of 3.5%, up from the 3.1% forecast in the previous quarter’s survey. boost to activity in 2012 is expected from earthquake reconstruction in Canterbury although there were significantly diverging views on the size and timing of that. The economists’ outlook for the 2013 March year is more subdued and growth is expected to moderate, with the average consensus figure of 2.6% unchanged from the September survey.

Real wages are expected to barely increase over the next two years, but personal tax cuts will compensate households for inflation from increased government charges. The labour market outlook is subdued but has improved marginally, consistent with increased employment expectations. The unemployment rate is forecast to trend down from 6.2% in the March 2011 year to 5.1% by March 2013.

The one area where economists show little consistency is in the exchange rate, which reinforces just how difficult this is to forecast with any certainty. NZIER notes “wildly divergent” views from hitting new highs to depreciating.

NZIER’s principal economist’s Shamubeel Eaqub’s own personal view is that the recovery will remain slow through the first half 2011, but pick up from mid next year. “Low interest rates, accelerating net migration and normalisation of spending and investing will be the key drivers.”

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