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Finding The Right Formula

by fatweb

By Kate Pierson

Nothing in life is ever certain, except of course for the degenerative nature of the human condition. One of the most unpredictable elements within any society is economic growth, because its health is perennially vulnerable to social, political, industrial and environmental factors.

But while an economy’s state of play may often be characterised by ambiguity, it’s a no-brainer that economic growth needs to be nurtured and achieving and maintaining a strong economic pulse requires balance and strategic decision making.

In September, New Zealand Reserve Bank Governor, Alan Bollard announced the official cash rate would be held at three percent — a move that was anticipated by economists. “While the global and domestic economies continue to recover, the outlook has weakened since our June statement. We consider it appropriate at this point,” Bollard explained of the decision. The Governor also maintained future rate hikes would be more moderate than previous forecasts given the disruption caused by the Canterbury earthquake.

The New Zealand Institute of Economic Research’s (NZIER) principal economist, Shamubeel Eaqub also discussed the OCR hold, commenting, “The RBNZ will pause in raising interest rates given near term growth risks and distant inflationary pressures. We expect the RBNZ to keep the OCR at three percent until March 2011 and then gradually increase to 5.5 percent by early 2012. Rates may rise earlier in 2011 if the recovery strengthens.”

Although the June quarter was the fifth consecutively in which GDP expanded following the recession’s five quarters of contraction, a four percent decrease in the manufacturing industry offset nearly all the growth in this quarter. “All manufacturing sub-industries, with the exception of wood and paper products were down in the June 2010 quarter,” Statistics New Zealand acting national accounts manager Stephen Oakley advised.

Crawling along

With only 0.2 percent growth in GDP when the market had expected 0.8 percent for the June quarter, these sluggish figures confirmed New Zealand’s economy was crawling.

“The recovery is slowing. This is evident in local and global data. There is sufficient momentum and stimulus in the economy to avoid a repeat recession, but the economy will be soft in the next six months,” Eaqub said.

In the wake of the Christchurch earthquake, New Zealand Treasury published an economic brief which estimated that the consequence of disruptions to the economy will reduce New Zealand’s September quarter GDP by 0.4 percent, relative to what would have been achieved had the earthquake not occurred.

So with the slow economic recovery confirmed and financial stresses attached to the October GST hike growing, what does this mean for economic growth? What will the government be doing to find the right formula to stimulate economic growth moving forward?

First and foremost, Eaqub advises that New Zealand businesses should be reviewing their investment and recruitment plans, as well as evaluating their risk exposures.

In August, Minister of Finance, Bill English offered reassurance that the Government has built its long-term economic plan around six key policy drivers:

  • Strengthening our tax system
  • Better, smarter public services
  • Reforming regulation
  • Education and skills
  • Business innovation and trade
  • Investment in productive infrastructure.

“The only way we can permanently lift New Zealand’s economic growth is through considered and consistent reform and change year after year. Budget 2010 took several steps in that direction — including across the board personal tax cuts from October 1, which will help narrow the gap in after-tax incomes compared with Australia,” English explained.

It’s palpable there is a comprehensive plan in place to help New Zealand’s economy recover and re-energise. But whether the plan has effective potential remains to be seen. If the NZIER’s expectation of an economic growth slump in 2011, before a rebound in 2012, is anything to go by, we could be waiting a while.

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