Rapid global downturn threatens economic recovery, Quarterly Predictions, December 2011 - media release

New Zealand Institute of Economic Research

Media release, 30 November 2011

Embargoed until 1am Thursday, 1 December 2011

Slow global growth to impact on export sector

“New Zealand’s fledgling recovery will be severely hampered by the rapidly worsening global economy”, NZIER’s Principal Economist Shamubeel Eaqub said today.

The details are in NZIER’s latest Quarterly Predictions – a comprehensive and independent commentary on the New Zealand economy and forecasts covering the next five years. Details and insights are available exclusively to NZIER members.

The fall-out from the European sovereign debt mess will depress export growth. It will weigh on exports and tourism, which had been a buffer. Investment will remain depressed because banks will find it harder to raise capital overseas. The uncertainty around the global outlook is also weighing heavy on business and consumer confidence and thus spending.

In our central scenario – where we assume a political solution is found that prevents the Euro area from breaking up – economic growth will be just 1.5% in 2012, gradually rising to 2.5% by 2014.

Domestic spending to remain soft

There is little domestic demand growth. Households are saving, the housing market is struggling, businesses are cautious about investing and the government is in a period of fiscal consolidation. The Canterbury rebuild will provide a much-needed injection of building activity from mid-2012, but the speed of the recovery programme is not yet clear. 

Interest rate rises off the table until mid-2013

Faced with the darkening global outlook and weak domestic activity, the Reserve Bank will not raise the Official Cash Rate (OCR) until mid-2013. Inflation will be contained as excess labour market capacity keeps a lid on wage growth and firms hold prices low to remain competitive. If the global situation worsens, the RBNZ will have to cut the OCR.

Return to fiscal surplus to be delayed

The slower recovery will dampen tax revenue. A 2014-15 return to budget surplus projected by the Treasury– estimated before the global outlook deteriorated so rapidly – will be challenging. Government spending programmes will face further scrutiny.

A more pessimistic scenario in Europe cannot be ruled out

“If the Euro area splits, New Zealand firms should prepare for another global crisis. This would restrict access to capital and push up global borrowing costs, in addition to an even weaker export outlook. New Zealand would likely experience another recession and the Reserve Bank would need to cut interest rates. We place the odds of such a scenario at about 25%”, Eaqub said.

 

For further information please contact:

Shamubeel Eaqub, CFA

Principal Economist

+64 4 470 1810

+64 21 573 218

shamubeel.eaqub@nzier.org.nz

Rapid drop in global growth expected

This chart is taken from Quarterly Predictions. It shows business and economic experts’ expectations of global economic growth are dropping sharply.   

NZIER more pessimistic than Consensus

This chart shows that NZIER’s economic growth forecasts for New Zealand are considerably lower than Consensus.