Key worried about NZ impact of Aussie GDP fall

Prime Minister John Key says news the Australian economy may contract in the first quarter of 2011 is worrying due to the fact Australia is New Zealand's single biggest export destination.

Australian Treasurer Wayne Swan warned yesterday that Australian GDP could shrink in the first quarter as the Queensland floods and Cyclone Yasi take their toll on the economy there.

However, despite the Australian slowdown, Key did not think it would mean New Zealand's "anemic" growth in the second half of 2010 would carry into this year.

"It worries me in one sense in that, we love to hate Australia (on the sports field), but let's be honest, they're 40 per cent of our (export) market. They're critically important," Key told media this morning in Wellington.

"One of the reasons we have taken the rough edges off the recession is, from a tourism point of view, huge numbers of Australian tourists coming over, and quite good exporting into Australia because of the competitive exchange rate," Key said.

"But what it just shows you is New Zealand's not going through anything different to Australia. Yep, growth was anemic in New Zealand in the last part of 2010, but it wasn't that flash in Australia either," he said.

"And if you look at their terms of trade, they've had a massive increase in terms of what they've been paid for their mineral resource. Now New Zealand's had a great up-kick in its commodity resource as well for mainly agricultural products, but again it's given Australia a big advantage," he said.

Key said he did not think the New Zealand's slow economic growth in the second half of 2010 would carry into 2011, even given the problems in Australia.

New Zealand GDP contracted 0.2 per cent in the September quarter, and some economists are forecasting there was a contraction in the December quarter as well.

Key himself said yesterday he could not rule out that the economy had entered into a "technical recession", meaning two consecutive quarters of GDP contraction.

"I'm much more optimistic this year. The feeling is quite strong out there," Key said.

"There are always factors that can de-rail risk. The Middle East is clearly one if we start seeing real issues there (around) oil prices (it could) put a lot of pressure on global growth. And of course there are issues around Asia - you can never rule those things out," he said.

"But net on net I think if you were objective you would say, 'all things being equal, we're going to see a better year this year.'"

"The main thing here is about building on that growth platform for a period of time that can really deliver those changes to structural imbalances.

Key said one thing he "absolutely confident of" was New Zealanders who borrowed and consumed a lot of foreign debt and "effectively spent a lot of money they didn't have," were going to change and adopt a different position for a period of time.

"So you better get used to the current position being normality for a while, which is people being more conservative about their spending, because that will have an impact on retail, but over time as the economy comes back we will see some more strength there," Key said.

- INTEREST.CO.NZ