Economy on the mend, but global threats loom, says NZIER

Exports have been a key support to the NZ economy, says the NZIER, and a global slowdown could mean trouble. Photo / Supplied.

The NZIER says the economy is still growing and should keep doing so next year, but the threat of a global slowdown hitting New Zealand is very real.

In its latest quarterly economic updates issued this afternoon, the New Zealand Institute of Economic Research's principal economist Shamubeel Eaqub said that our economy should grow by 1.4pc this year and 2.6 per cent in 2012.

"The New Zealand economy is on the mend, but weak global growth is threatening this recovery. An abrupt slowdown in the Australian economy, renewed recession fears in the US and a spreading sovereign debt crisis in Europe will soften global growth. New Zealand's economic growth will be slow" Eaqub said.

A vulnerable global economy and a high New Zealand dollar meant the Reserve Bank should not raise interest rates until June next year. After that, rates rises should come cautiously, said Eaqub, since 83 per cent of mortgages are short term.

"Even a 1 per cent point interest rate increase will raise the annual mortgage bill by $1.4b or 2.2 per cent of annual retail spending," he said.

The Reserve Bank is next due to announce any change to the Official Cash Rate on September 15, along with its quarterly Monetary Policy Statement.

New Zealand's economy kicked off 2011 with a bang, growing at twice the forecast pace and the fastest since December 2009 as a resurgent manufacturing sector drove the nation's revival in the face of Canterbury's earthquakes.

Gross domestic product grew 0.8 per cent in the three months ended March 31, said Statistics New Zealand last month, beating a Reuters survey of economists, which was picking 0.4 per cent growth and Treasury and Reserve Bank forecasts of just 0.3 per cent expansion.

That was the fastest pace of growth since the final quarter of 2009, when the economy grew 0.9 per cent. Annual GDP rose 1.5 per cent to $135.8 billion, the biggest the New Zealand economy has been in a March year since 2008.

But a strong fear of the world's economic situation can be seen in the NZIER's predictions, since exports have been a key support to the New Zealand economy.

"A renewed global slowdown, particularly without the buffer from Australia, will weigh on export prices and volumes. Tensions in global markets will also see the New Zealand dollar remaining higher for longer, further weighing on exports."

On the earthquake, Eaqub said the economic potential of the Canterbury region might now be permanently smaller.

- NZ HERALD ONLINE / BUSINESSDESK