New Zealand's slow economic recovery is necessary to get household and government finances back in order, but without significant policy changes the government will struggle to reach its surplus target in the 2014/15 year, the New Zealand Institute of Economic Research (NZIER) says.
Releasing its latest quarterly predictions, NZIER retained its expectation that the Reserve Bank would be able to keep the Official Cash Rate on hold at its record low 2.5% until mid-2013. That is further out than expectations of bank economists, which are pointing to the next possible OCR hike in December this year or the first quarter of 2013.
“The economic outlook is flat. Most indicators are moving sideways. But given the state of the global economy and the ongoing ‘hangover’ from excessive borrowing in previous decades, this is not a bad state to be in. The slow recovery is a necessary part of putting household and government finances in order. This will put the New Zealand economy back onto a more sustainable growth path”, NZIER’s Principal Economist Shamubeel Eaqub said today.
“We expect only 1.5% growth in 2012, recovering to 2.4% in 2013. The rebuild in Canterbury will ramp up gradually from mid-2012 through to 2013. We are less optimistic than most on the timing of the rebuild, as we think persistent aftershocks, tougher building codes and insurance issues will slow Canterbury’s recovery," Eaqub said.
Risk of financial Armageddon has eased
The global economy was slowing with key Asian export indicators slumpiong.
"Activity in key Australian states, NSW and Victoria, has slowed sharply. This is offsetting brighter data from the USA. This is a risk to New Zealand exporters. But the risk of another global financial crisis, this time in Europe, has eased. The ECB has shored up European banks with cheap long term funding," Eaqub said.
Interest rates on hold until mid-2013
"The RBNZ will hold interest rates steady for some time, as the economic outlook is flat and inflation is subdued. We expect the OCR to remain at 2.5% until mid-2013. Any increases in interest rates should be contingent on convincing evidence of a sustained economic recovery and inflation pressures," he said.
Fiscal surplus requires tough choices
A flat economy would make it harder for the government to return to surplus in 2015 without significant policy changes.
"We expect the Budget to be released in May 2012 to reprioritise spending. We would like see a reduction in low value spending, such as interest free student loans, working for families and KiwiSaver subsidies. These savings should be used to reduce the deficit, and to increase investments in the economy, in infrastructure, education and training in particular," Eaqub said.
(Updated with video interview)
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