Economy still in fragile shape - Treasury

Despite signs of economic recovery, many risks still threaten the sustainability of economic growth, Treasury said today.

Releasing its monthly economic indicator report for November today, Treasury said households were still acting cautiously as they face limited wage growth, lower employment prospects and considerable levels of debt.

With unemployment at its highest level since 2000 at 6.5 per cent it would take time for the number of employed to increase even as economic growth picked up.

There were signs that some were spending more and consumption might boost GDP.

Businesses were on the surface saying they were optimistic, indicating a strong boost to GDP, but their underlying employment and investment intentions did not support such as strong rise.

Positive net migration was helping to boost the housing market and the building sector was starting to recover from historically low levels.

"However, there are risks around the sustainability of the recovery. With employment and salary and wage growth likely to remain soft for a while, consumption is likely to remain subdued. Moreover the value of capital good imports is well down on a year earlier, pointing to weak investment activity in the near term," Treasury said.

Exports had been boosted by continued recovery in world economic growth and the boost in dairy prices.

Global financial markets' nervousness around the sustainability of the recovery had been highlighted by recent concerns that Dubai would default on loans.

Finance Minister Bill English said the report was a mixed review of the state of the economy.

"As we have said, there are some positive signs as we emerge from the recession, but the road to recovery will be bumpy."

The Government like the public was also hurting with the recession still hitting tax revenue, Mr English said.

Treasury said in the report that tax revenue in 2008/2009 was $2.1 billion down on the previous year.

Changes to personal income tax rates and thresholds reduced tax by $1.7 billion, which was balanced by about $1 billion in wage growth.

The decline in source deductions during 2009/2010 continued to decline and the Government expected to collect less tax than it did in the previous year.

Changes to the corporate tax rate had taken out $1 billion from revenue, declining profits also reduced it by $1.1 billion and this fall was likely to continue through this year as many large companies struggled through the recession.

Many of these losses had been offset by the $1.4 billion paid by banks over the disputed tax treatment of structured finance transactions.

All tax types were down in 2008/2009 with the exception of GST which increased by 3.9 per cent there had also been weak growth in 2009/2010, Treasury said.

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