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NZ economy out of kilter

The picture of a New Zealand economy out of kilter with the rest of the world grew sharper with the release of the Reserve Bank’s latest monetary policy statement last week.

Monday, August 20th 2001, 2:28AM

by Rob Hosking

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The picture of a New Zealand economy out of kilter with the rest of the world grew sharper with the release of the Reserve Bank’s latest monetary policy statement last week.

Reserve Bank governor Don Brash left the official cash rate unchanged at 5.75%, as most bank economists anticipated. -.

The difference is we are doing relatively well, economically, while the growth forecasts of 14 of New Zealand’s trading partners have been downgraded in recent months.

"At this stage only Australia, among our major trading partners, appears to be relatively immune to the international slowdown," Dr Brash says.

"If the international environment were to turn out substantially weaker than our projections have allowed, there seems little doubt that the disinflationary pressures on New Zealand coming from overseas would intensify."

Onshore though it is a more upbeat story. although the growth the bank is seeing remains potential at this stage.

Firstly, there is the low dollar feeding through the country’s exporters and into the rest of the economy. This flow has been a bit more economically "sticky" than in previous years, but the bank remains reasonably certain that it will reach the domestic economy. Thus far, though, exporters – especially farmers - have tended to use their extra income to pay off debt.

The bank points to business opinion surveys which show firms are more upbeat about prospects for their own business and, generally, have a more expansionist attitude to investment. This upbeat mood is strongest in the more predominantly provincial areas suggesting this mood is largely an exporter/farmer generated feeling of optimism.

On top of this New Zealand is experiencing its tightest labour market since 1988. Job advertisements are high, unemployment is low and firms reporting difficulties in hiring skilled and unskilled labour.

Dr Brash however rejected calls from the business lobby groups and others to lower the interest rate.

"The business community would always like to see lower interest rates, he said.

Dr Brash also rejected a call from WestpacTrust Bank chief economist Adrian Orr to bring the New Zealand official cash rate in line with Australia’s.

Orr was, until a year ago, the Reserve Bank’s chief economist and Dr Brash dryly observed that "of course I listen to Mr Orr’s views with great respect."

But there were enough differences between the two economies to warrant a separate approach, he said.

"They have higher unemployment than New Zealand, and it is increasing, whereas ours is going the other way. Secondly they are more exposed to Japan and other Asian countries than we are. Thirdly, what is a neutral interest rate for New Zealand is a little higher than what it would be for Australia – we are a smaller economy, more narrowly-based, and there is a risk premium attached to that."

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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