New Zealand Property Investors' Federation

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29-06-2007

Rebound shows 'remarkable resilience'

Business confidence is rebounding, despite high interest rates and a high-flying Kiwi dollar, in another sign of "remarkable resilience", economists say.

The National Business Outlook for June shows a net 37 per cent of firms expect business conditions to worsen in the next year, an improvement from the net 48 per cent in May.

The survey pointed to the economy slowing to a sluggish growth rate of about 1.5 per cent, but not being bowled over by three interest rates rises or a dollar close to US77c.

House-building consents are up 5.5 per cent in a month and the monster current account deficit is past its peak, at $13.9 billion for the March quarter, according to figures also issued yesterday.

Wellington Regional Chamber of Commerce chief executive Charles Finny said the deficit showed the Kiwi dollar was "substantially overvalued" and he expected a correction of up to 30 per cent against some currencies.

The deficit was equal to 8.5 per cent of gdp, down from 9.7 per cent a year ago.

The figure was in line with forecasts, though further improvement was expected to be gradual.

Economic growth figures due out today are expected to show growth of about 1 per cent in the March quarter.

The biggest tailwind for confidence and the economy is rapidly rising commodity prices, especially dairy products and a big jump in the forecast payout by Fonterra.

But the Reserve Bank will keep raising rates till it sees a clear economic slowdown and the inflation genie back in the bottle.

Though confidence was better than in May, the survey would not have fully captured the impact of the Reserve Bank's surprise decision to lift the official cash rate this month, or the recent spike in the Kiwi dollar.

The results in the National Bank survey showed a net 15 per cent of firms expect their operations to improve, a bounce-back from a big fall in May.

That suggested annual economic growth of about 1.5 per cent, a slower pace than during the first half of the year, but still resilient in the face of a currency hitting almost US77c this week.

The dollar was trading about US76.5c late yesterday.

Though some exporters are suffering from a high Kiwi dollar, the economy is still showing signs of strength, and a fabled "soft landing" in the past 18 months has still not brought inflation under control.

That meant the Reserve Bank may well increase interest rates again next month, National Bank chief economist Cameron Bagrie said.

"They have no inflation headroom, so there is no more mucking around. The Reserve Bank will engineer a slowdown," he said.

However, with growth sluggish, that left the economy vulnerable to a repeat of the recessions of the early and late 1990s when there were also high interest rates, a high dollar, over-valued housing market and a high current account deficit.

"Those things slowed us to stall speed of 1 to 1.5 per cent growth, (in the 1990s) and then something has come along from offshore and knocked us for six," he said.

"That's where the big risk for New Zealand is at the moment."

The dollar would not turn down till market players were sure the Reserve Bank had finished raising rates.

The high dollar is good for cheaper imports but the central bank is more worried about domestic inflation.

A clear sign of that was the building consent figures, with construction prices up about 11 per cent in a year.

Residential consents were 5.5 per cent higher in May, partly because of a jump in apartment consents.

But some builders were rushing to seek approvals before July 1, when council fees increase.

DOMINIONPOST

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