Light at the end of the tunnel? Economic growth prospects rise

For the first time in over a year economic growth prospects have been revised upwards, the New Zealand Institute of Economic Research says.

In its latest Consensus Forecasts Survey, the institute says the growth prospects are consistent with accumulating evidence of improving economic trends.

The forecasts are an average of New Zealand economic forecasts compiled from a survey of financial and economic agencies for the March year.

However, there is a wide divergence of views on the sustainability of the current recovery and the path of the exchange rate.

Surveyed forecasters remain pessimistic on the labour market, with the unemployment rate expected to peak at 7.3 per cent (from 6 per cent now) and a further 30,000 job losses by March 2011.

Figures show improvement in March 2010 year economic growth forecast from -1.6 per cent in June to -1.3 per cent now.

Economic forecasters expect economic growth to improve to 2.7 per cent and 3.4 per cent in the March 2011 and March 2012 years respectively.

Forecasters expect quarterly GDP to have contracted by 0.2 per cent in June and to resume growing in September (+0.1 per cent).

Economic growth is expected to average 1.3 per cent over the year to March 2010 (up from -1.6 per cent in the last survey).

Expectations for the recovery are consistently optimistic (+2.7 per cent to March 2011 and +3.4 per cent to March 2012).

Despite a noticeable improvement in the housing sector (expected to contract by 16.9 per cent in 2010 and to grow by 17.9 per cent in 2011, compared to -22.8 per cent and +14.5 per cent previously), total investment is forecast to contract further in the year to March 2010.

Most forecasters expect it to grow again over the year to March 2011.

Following the improvement in the economic activity outlook, expectations for the labour market have been revised upwards but remain negative.

Employment is expected to decline by 1.8 per cent over the year to March 2010, less severe than -2.7 per cent in the last survey, and to improve in following years.

Job losses and subdued wage increases are still likely to weigh on household spending but forecasters are less pessimistic than in the previous survey.

There is considerable uncertainty in a consumer recovery, ranging from a strong recovery to protracted stagnation; this uncertainty is reflected in the wide range of forecasts in the survey.

Expectations for exports have significantly improved. They are now forecast to contract by 1.1 per cent in March 2010, compared to -4.1 per cent previously.

This partly reflects a very resilient export sector to date. However uncertainty has increased and this is likely related to a wide range of views on the currency.

Imports are still expected to drop over the next year (by 12.4 per cent) before recovering in line with the domestic economy.

Inflation forecasts have been revised upwards but remain in the lower part of the Reserve Bank's target band until the end of the forecast period.

Forecasters on average now expect annual consumer price inflation to be 1.9 per cent in March 2010 (from 1.6 per cent) and to remain flat until 2012.

The Kiwi dollar is currently strengthening and expectations have been revised upwards.

On average the trade weighted index is forecast to remain flat over the forecast period between 60.0 and 60.5.

But there is considerable divergence in views, with some expecting appreciation from this point, and others renewed and protracted depreciation. This may well play a very big part in the ultimate durability of the current recovery.

- NZPA