The Economic Outlook: From Sprint Star to Marathon Runner
WestpacTrust chief economist Adrian Orr says that New Zealand'seconomy has gone through a major transition in recent years.
Friday, September 8th 2000, 1:05AM
WestpacTrust expects GDP growth to average around 3%-3.5% per annum for the next couple of years, close to its sustainable level. "Growth at these levels will imply only modest pressure on domestic inflation and a reduction in the current account deficit," WestpacTrust chief economist Adrian Orr says. "This is a very different growth scenario to that of the 1990s, when the economy bolted from the blocks, but eventually hit the inflation and current account deficit growth barriers."
Rising household debt, as reflected in the current account deficit, is one reason for a more sedate expansion. "The next 12 to 24 months is likely to be a period of consolidation for New Zealand households, with consumption growth only likely to match income growth at best," Orr said.
With New Zealand opting for the marathon race, Orr said that investor interest is likely to continue to struggle. "Investors, both domestic and foreign, have the luxury of backing the best international sprinters, with the US perceived as a winner at present. The entry tickets to New Zealand’s marathon are thus likely to be sold at bargain prices.
"The NZD is expected to appreciate modestly from early 2001, but struggle to reach anywhere near its cyclical peak of the 1990s. This means New Zealand exporters are looking at a sustained period of improved earnings, as long as domestic costs remain constrained. In addition, between now and the end of the year the NZD will remain handcuffed until several factors line up. The key factors include slower US growth and confirmation of a turnaround in New Zealand’s current account deficit," Orr said.
With investors looking elsewhere, New Zealanders will increasingly rely on their own savings to fund investment and consumption. This implies a floor on New Zealand’s longer-term interest rates. In addition, with activity expected to operate at or near capacity over the next couple of years, modest upward pressure remains on short-term interest rates. WestpacTrust expects a further rise in the Official Cash Rate later this year and/or early next year. However, the cyclical peak in interest rates will remain well below those of the mid-1990s.
"Like most recoveries, economic fortunes will be a mixed bag across the various sectors of the economy. The recent data indicates that domestic growth has cooled off, but the export sector continues to go for gold," said WestpacTrust Economics. "We are thus likely to see unemployment emerge in some sectors, and capacity constraints in others. If resources struggle to shift to where demand is strongest, then inflation pressures will emerge."
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