By BRIAN FALLOW
WELLINGTON - There were two positive surprises on the economic front yesterday: the long-expected downgrade from Standard & Poor's failed to materialise, while the December quarter economic growth was twice as strong as forecast.
The credit rating agency affirmed New Zealand's AA+ status, but also maintained the "negative outlook" tag that has applied for the past 18 months.
Gross domestic product growth was 2.2 per cent for the quarter compared with the average forecast of 1.1 per cent. It follows a revised 2.5 per cent for the September quarter. On an annual average basis, growth was 3.5 per cent last year, the strongest it has been for four years.
Just under of a third of the growth (0.7 per cent) reflected private consumption, still buoyant despite the start of interest-rate tightening in November.
Encouragingly for the sustainability of the recovery, business investment made a similar contribution. Investment in plant machinery and equipment during 1999 was 16 per cent higher than in 1998. Nor is that a rebound from a low recession-hit base, because, unlike the recessions of the early 1990s and 1980s, business investment has been holding up well.
Exports were up 1.8 per cent, but imports were also strong. Excluding the imported Te Mana frigate, net exports contributed around 0.3 per cent to the growth number.
Stock-building accounted for about 0.4 per cent of the figure. Much of that is output from dairy factories which has yet to be shipped.
Deutsche Bank chief economist Ulf Schoefisch said the December GDP added to the string of unpleasant surprises for the Reserve Bank since it finalised its March monetary policy statement, in particular the strong growth in import prices in the December quarter and the continued weakness of the dollar.
"There is now no doubt that the economy is growing strongly. Indeed it appears it is growing at an unsustainable pace.
"Using Governor Brash's familiar analogy, the time has arrived to not only ease off the accelerator but to begin to gently apply the brake."
Deutsche Bank expects Dr Brash to raise the official cash rate 25 basis points on April 19 and another 50 points in May.
Bank of New Zealand chief economist Tony Alexander said the cash rate would certainly be 50 points higher by May 17, "but we are 50:50 whether they will do half of it in April."
Standard & Poor's pointed to high levels of private-sector debt. The corporate sector's external debt has increased from 30 per cent of GDP in 1995 to 45 per cent last year.
"At more than 160 per cent of exports this year, private sector net external debt is more than four times the median for AA-rated sovereigns."
The negative outlook also reflected the risk that the coalition would not meet its target of running budget surpluses over the economic cycle.
Finance Minister Michael Cullen said he accepted Standard & Poor's was unlikely to take New Zealand off negative credit outlook given our high private-sector debt levels and balance of payments deficit.
"We recognise that for as long as these problems persist, it is essential that the Government run a conservative fiscal policy."
He said the Budget would help eliminate concerns about future surpluses.
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