Quarterly Economic Forecasts
February 2010
Summary
Momentum is building and our central scenario has the economy recovering progressively over 2010 and
2011. History shows that recoveries tend to surprise on the upside. Yet at the same time, we are
mindful of structural forces at play as the economy adjusts to a “new normal” – voluntarily or not.
In this environment, we encourage readers to focus on the underlying trends over a number of years,
which is for modest growth, with upside being capped by the rebalancing process, de-leveraging and
resource allocation shifts.
Global outlook
The global economy is healing courtesy of aggressive steps taken by policymakers. Despite
this a lot of tensions remain. We expect the recovery process to be gradual.
Fiscal policy
Fiscal policy is set to become less expansionary over the coming years, as fiscal
consolidation takes hold.However, it will be changes to the tax and regulatory systems that
will be more important in getting a step-change in NZ’s economic performance.
Inflation
Medium-term inflation drivers are well contained at present.Despite a temporary push
above the top of the policy band courtesy of government related charges, the outlook looks to be one of
inflation remaining comfortably within the band. However, a key uncertainty in this regard is the
supply-side capacity of the economy at present.
Exchange rate
> Support factors remain for the NZD but the uptrend for the NZD that has been in place since
March 2009 looks to have been broken. An ongoing firmer USD – on a weaker EUR – is set to be the
key feature of 2010. At this juncture we believe the NZD is biased lower over the year ahead, before
structural forces support over the medium-term.
Interest rates
Central banking looks easy in 2010, in theory at least. If credit growth picks up,
remove liquidity. If not, maintain the status quo. We expect the RBNZ to begin the journey back to a
more neutral policy setting from mid-year. Rather than a straight line, we envisage two stages. We
also foresee a structural shift lower in the neutral OCR which should result in a lower peak.
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