The New Zealand’s economy is likely to grow in 2010, thanks to rising consumer spending and global demand for exports, according to the latest update from the New Zealand Institute of Economic Research.
The economy will expand 2.6% next year after contracting by 0.9% this year, the Institute said in its latest quarterly report.
But the economy would regain pre-recession levels of activity until 2012.
“The next few quarters will be bumpy as the economy slowly converts the rebound into recovery,” according to Shamubeel Eaqub, the Institute’s principal economist.
“The New Zealand economy is out of recession. We expect continued improvement," he said.
"There are still significant risks to the economy from renewed over-valuation in the housing market, rising unemployment, persistent external imbalances and rising oil prices.”
The Institute said that the Kiwi economy emerged from its worst recession in three decades in the second quarter of the NZ financial year, which is the three months to September, when gross domestic product increased 0.1%.
"There is little urgency to raise interest rates given weakness in the economy and risks to the outlook. We expect the RBNZ to raise interest rates from the September quarter 2010,"
“We estimate the economy contracted by -0.9% in the 2009 calendar year (consensus -1.6%) and expect a subdued 2.6% recovery in 2010 (consensus 2.0%).
"Our above consensus forecast for 2010 is due to less import dependent consumption recovery and more resilient exports.
"Our view on the construction sector is weaker than consensus; we expect a shallower recovery due to slowing net migration, rising interest rates and rising vacancy impacting on commercial real estate.”
“Household spending is set to recover over the next year due to pent up demand for big ticket items.
"A full fledged recovery in spending will likely take place in late 2010, when the labour market improves.
"The unemployment rate may head higher towards 8% in mid-2010, from 6.5% currently.
"Businesses have adjusted to weaker demand by cutting back hours rather than firing staff – this should ensure a relatively smooth return to activity when demand returns.
“The RBNZ is set to raise interest rates from the second half of 2010.
"We expect the RBNZ to raise the OCR towards 5.5% by mid-2011 starting in the September quarter 2010, from 2.5% currently,” Mr Eaqub said.
“The NZD may find continued support in the near term, particularly against the economically vulnerable USD and GBP.
"However, the medium term case for sustained NZD depreciation remains in place, due to unsustainable external imbalances."
Reserve Bank Governor Alan Bollard indicated last month the central bank plans to keep the official cash rate at a record-low 2.5% until the second half of 2010 because the economy needs further stimulus as it recovers from a recession.
Like in Australia the low rates are helping lift demand in the economy, especially for housing.
NZ house prices have risen 9% from January of this year (when they touched a three year low).
The country is seeing its strong growth in immigration in almost six years as fewer residents leave, especially for Australia.
But the recovering Australian economy may see that reverse in 2010 as it becomes more attractive to New Zealand job seekers.
The big argument in NZ at the moment is the value of the Kiwi dollar.
It’s jumped 35% against the US dollar in the past year, dragged up by the relatively high yields (interest rates in NZ of 2.5% versus 0%-0.25% in the US or 0.1% in Japan).
But as the US dollar continues to weaken, the value of the Kiwi currency rises (as does that of the Aussie dollar).
Those factors are outside the country’s control.
In his half yearly financial stability report last month Mr Bollard said “The rise in the New Zealand dollar over recent months could hinder continued improvement in the external balance.”
He said the currency’s current level “is unlikely to be sustainable”.
But it has hurt NZ exports, although prices for some rural products, especially dairy items, continue to rise to their highest levels for over a year, offsetting some of the damage from the higher dollar.
The Institute says it assumes the currency will stay higher for longer, reflecting weakness in the US dollar and the pound, and the Reserve Bank won’t need to raise interest rates as high as in previous economic cycles.
