Cullen will have to grapple with difficult economic climate

Finance Minister Michael Cullen will deliver his seventh budget on Thursday amongst the gloomiest economic weather he has faced since 2000/2001.

For the past five years New Zealand has experienced healthy economic growth, record low unemployment, high corporate profits and a wealth boom due to rising pay rates and housing values increasing

The end of 2005 and 2006 saw the years of the golden weather all go a bit overcast, or as economists like to describe it - experience a "necessary re-adjustment".

Exporters had been hurting from the high value of the New Zealand dollar for some time and now they are getting some relief, but this means others are being hit by the higher price of imports.

This inflation in turn means the Reserve Bank keeps interest rates up, hurting more and more mortgage holders who have been borrowing to the hilt in the past ten years.

On top of all this, everyone is being hurt by higher oil prices which could get even more expensive if the dollar keeps heading downward.

Treasury's economic outlook on Friday will be largely based on economic data released four weeks before in April.

Treasury said in a recent briefing that April saw the release of data that was a little more upbeat compared to March.

"However, most indicators still point to a period of weak growth during 2006".

While New Zealand could be in a technical recession now -- two quarters of economic shrinkage -- by past standards it is a mild one.

Treasury said the last month had seen net migration increase, retail sales lift and house prices continue to rise, albeit at a slower rate than in 2005.

The immigration statistics were a little surprising with anecdotal evidence of an exodus across the Tasman. Instead annual net migration lifted to 9700 in the year to March 2006 after falling to 6000 in the year to October 2005.

This is a particularly important figure for Dr Cullen; a flood of immigrants after the September 11 attacks was an important factor behind the last few years golden weather.

New immigrants bring new money and they spend it. If this positive pattern continues it will help New Zealand withstand a bad 2006.

In some ways the mild economic gloom will assist Dr Cullen on Thursday.

He will be able to pare back expectations about spending and of course the affordability of tax cuts.

Dr Cullen will also highlight that by banking operating surpluses in various investments that the New Zealand Government for the first time, since records started, has more assets than it does liabilities.

The steady drop in government borrowing in comparison to gross domestic product will also mean he can justify borrow a little more if the economic bad weather turns into a long nasty winter.

- NZPA