By BRIAN FALLOW
WELLINGTON - The Institute of Economic Research expects weak business confidence to constrain economic growth in the year ahead.
It still expects the economy to expand 3 per cent in the year to March 2001, but that is significantly slower than the 4.3 per cent it was forecasting three months ago, or the 4.8 per cent growth it estimates occurred in the March year just ended.
The problem is not on the demand side. Exporters stand to benefit from stronger growth in New Zealand's trading partners, commodity prices which are on the way up and a relatively low exchange rate, forecast to firm 7 per cent over the next 18 months and then stop.
Consumer spending, on the other hand, is expected to slow from the feverish pace of last year as higher interest rates, combined with flat house prices, make households more debt-averse.
Demand is not the whole issue, the institute says.
The concern is that uncertainty about Government policy changes, coming on top of mounting costs, will discourage businesses from investing to the extent needed to rise fully to the increased demand.
Hiring and investment intentions are very subdued, considering levels of activity, it says.
"We expect this effect to intensify over the rest of the year. Business investment and employment will still grow, but total growth will most certainly be weaker than it would otherwise have been without the crisis of confidence."
For the time being, the institute has only pared back its projections, but the risk is that domestic demand will enter a vicious cycle of reduced employment and consumption, it says.
A more sanguine view is taken by Bank of New Zealand chief economist Tony Alexander.
He is still picking a strong rebound in business investment this year and next year, as firms respond to an unusually positive export outlook.
"I have come across business people who feel silly because their outlook is positive and they want to invest, yet they see everyone else being very negative or cautious. But I expect that feeling of `I must be missing something because I'm feeling positive' to dissipate," says Mr Alexander.
Business demand for credit is weak, but he interprets that as investment plans being delayed rather than abandoned.
"The underlying forces for this economy are exceedingly positive in the export sector and we expect these positives to be sufficient to offset the current `sky is falling' hysteria and to produce overall economic growth averaging 0.9 per cent a quarter this year, easing off to 0.7 per cent a quarter over 2001."
Business and Economic Research Ltd (Berl) is forecasting a small confidence crisis-induced stalling of the recovery over the first half of this year, with growth of 0.2 per cent in both March and June quarters, before the investment cycle kicks in and growth recovers to the 0.5-0.6 per cent a quarter range.
Berl economist Ganesh Nana says the danger with slumps in confidence is that they can be self-fulfilling, whether justified or not.
"But if we can't make an export recovery with the dollar at US47c, then we are in the cart," says Dr Nana.
Berl links the crisis of confidence to aggressive tightening by the Reserve Bank.
Forecasts reject `sky is falling' view
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