NZ growth to pick up, says OECD

PARIS - Economic growth in New Zealand should pick up pace in the second half of the year as exports improve and interest rates start to come down, the OECD said today.

However, the global economic watchdog also warned that NZ's growth in 2006 will be only half that of last year.

Growth is expected to slow to 1.1 per cent in 2006 from 2.2 per cent last year, the Organisation for Economic Co-operation and Development said in its semi-annual Economic Outlook.

"After a subdued first half of this year, economic activity is projected to gradually pick up pace, with a shift from domestic demand to export-led growth," the Paris-based group said.

The economy, previously driven by a housing boom and strong consumer demand, slowed sharply at the end of last year as inflation pressures and falling profits hit companies.

Despite that slowdown, the Reserve Bank of NZ has held its official cash rate steady at 7.25 per cent this year, citing the need to stifle inflationary pressures, after raising it nine times between January 2004 and December last year.

The OECD said interest rates were expected to start falling from the second half of this year, but the timing would be a problem.

"Easing too early would allow second-round effects from the exchange rate depreciation to become embedded in inflation expectations, while easing too late could incur unnecessary losses in output and employment," it said.

A recent Reuters poll had 10 out of 14 forecasters expecting the central bank to cut its official cash rate at least once by a quarter-point by the end of this year.

Inflation, which hit 3.3 per cent in the year to March 31, is expected to peak at 3.5 per cent this year, well above the central bank's 1-3 per cent target range, before easing to 2.9 per cent next year.

The strength of the New Zealand dollar dented export returns last year, causing the current account deficit to blow out to 8.9 per cent of gross domestic product.

However, the OECD said the fall in the kiwi -- nearly 10 per cent so far this year -- had helped to lift business confidence and would improve prospects for exporters.

The current account deficit is forecast to worsen to around 9.4 per cent of gross domestic product in 2006 before easing to 8.6 per cent next year.

- REUTERS