Some encouraging economic signs

The Reserve Bank left the Official Cash Rate unchanged at 2.5%, rate which governor Alan Bollard said should be “appropriate for some time”. The economic outlook remained “very uncertain” following February’s Christchurch earthquake when the OCR was cut as insurance to help limit the adverse effects.

But confidence and consumer spending had since shown signs of recovery, and while many firms and households remained adversely affected in Christchurch, activity in the rest of the country appeared “relatively unaffected”, Bollard reported, with housing market turnover and business investment beginning to increase.

Trading partner growth remained robust, helping push export commodity prices higher, and the improved price outlook was supporting pickup in on-farm investment. However, on the negative side of the ledger, higher oil prices and the strong NZ dollar were “both unwelcome”, said Bollard, and would dampen economic activity.

The governor also did not appear as concerned by the outlook for inflation as some economic commentators. Headline inflation had been lifted by recent increases in indirect taxes but annual inflation was expected to settle “comfortably” within the target band once the tax increases dropped out of the annual rate.

The Herald’s Brian Fallow welcomed the more cheerful tone to the bank statement. While the markets were trying to divine the extent of “some time”, the nuances of the statement were relatively upbeat, he said.

The immediate forex market response was to lower the NZ dollar (it lost around US$0.05, before firming again) while the sharemarket made modest early gains.

Two other reports this week fortified the buoyant mood. The National Bank’s latest Business Outlook reported big rebound in business confidence that had slumped in March. Half of March’s fall was recovered with net 14 percent of businesses expecting better times for the economy over the coming year, up 23 points on March.

Firms’ own activity expectations, the important measure of what businesses think about their own prospects, lifted 15 points to net 30 percent expecting improvement over the year ahead. To recover two-thirds of the fall in activity seen in the previous month was “encouraging”, the National Bank said.

More optimism came from Westpac economists. While they lopped their January GDP forecast for this calendar year (3.3%) to 1.3%, next year’s forecast has been lifted from 3.1% to 4.6%. Reconstruction activity in Christchurch next year will provide growth impetus, they say, although rising interest rates will crimp activity in some parts of the economy.



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