Steady but unspectacular economic growth predicted

The NZIER consensus forecasts predict GDP growth of 2.1% in the 2012 March year (cf with Treasury’s 1.8%) before matching Treasury’s 4% forecast in 2013. Treasury then expects GDP growth to tail off to 3% and 2.7% in 2014 and 2015, respectively, with average GDP growth of 3% over the four-year forecast period. Overall, it’s picture of unspectacular, albeit steady, growth.

Forecasters in the NZIER survey are tad more optimistic than the previous March survey. Economists expect GDP to contract by -0.1% in the March 2011 quarter (data due for release July 7), but rebound by 0.5% in the June 2011 quarter that we are just completing. Forecasters are little more optimistic about the March 2012 year (2.1% from 2%) and 2013 (4% from 3.9%).

NZIER says the Canterbury rebuild continues to be central pillar of stronger economic growth, particularly for construction. Continuing aftershocks complicate the outlook with economists’ views diverging on the scale and timing of reconstruction in the region.

Most economists aren’t as sanguine about inflation as The Treasury with the consensus being that it will remain elevated at 2.7% in the March 2013 year compared with Treasury’s forecast of 2.4%. NZIER says inflation expectations have been rising across many surveys in recent months and this will be of concern for the RBNZ, which is mandated to control inflation between 1% and 3% over the medium term.

Neither is NZIER’s panel of forecasters as optimistic about the pick up in employment. They expect gradual recovery in the labour market will see the unemployment rate trending down from 6.6% in 2011 to 5.3% in 2013, not as low as Treasury’s 4.8% forecast for 2013. These improvements will feed through to higher salaries, although inflation will erode much of the wage gain. Consensus forecasts are that nominal wages will grow by 2.9% in 2012 and 3.5% in 2013. “Small increases in real incomes will be welcome relief to households and will support gradual recovery in household spending,” says NZIER.

Economists appear to be hedging their bets on the exchange rate, notoriously difficult to predict with any degree of precision. NZIER’s consensus forecast shows broadly steady NZD over the next two years. There is some typical divergence, with expectations ranging from renewed appreciation to peak levels to moderate depreciation but exporters should gird themselves for an exchange rate that is expected to stay relatively high in the coming years. An elevated exchange rate will reduce export competitiveness and growth rates and stoke import demand, leading to worsening trade balance.

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