By Brian Fallow
WELLINGTON - Despite an improving export outlook, the external deficit is set to remain the economy's key structural problem, says Deutsche Bank in its latest quarterly forecasts.
It expects exports to grow at a brisk pace (4.4 to 4.8 per cent) over each of the next three years, based
on a bullish view of the world growth outlook.
Export earnings should also benefit from a recovery in commodity prices.
But that will be offset to some degree by a rising New Zealand dollar. Deutsche expects the dollar to be around 58USc by the middle of next year, 10.5 per cent above its present exchange rate.
"Further out we forecast the upward momentum to slow somewhat as the continued high current-account deficit is likely to weigh on the NZ dollar's performance." It has the kiwi at around 61USc two years out.
"An expected cyclical peak of 62USc would leave the currency significantly closer to fair value than over the last cycle and support a continued strong export performance."
However, while the export outlook is very positive, Deutsche Bank said, continued strong demand for imports would constrain the improvement in the trade balance.
"Furthermore, most of the medium-term trade improvement is expected to be offset by a worsening investment income deficit, due to a recovery in company earnings, rising world interest rates and the funding costs related to continued high deficits."
Deutsche Bank sees inflationary pressures as significantly greater than the Reserve Bank at present envisages.
