Economy worse than December downside scenario, Treasury says

Treasury has said that New Zealand's economy is currently weaker than forecast in its December update downside scenario and that economic growth in 2009 and 2010 is expected to be lower than the downside forecasts. The comments came before the latest NZIER Quarterly Survey of Business Opinion was released, which indicated a bigger contraction in March quarter GDP than the 0.9% seen in the December quarter. Treasury's downside scenario forecast in December was for GDP to shrink 0.2% in 2009 and 0.3% in 2010. Treasury forecast in its downside scenario that unemployment would rise to 7.2% in 2010. Treasury also said in early March that economic indicators such as growth and unemployment would be worse than those in its December downside scenario. This will increase the pressure on Finance Minister Bill English to find cost reductions as he finalises his budget for release on May 28 and scrambles to keep New Zealand's AA+ credit rating. Late yesterday it emerged English had asked various government departments to freeze pay packages this year. In its Monthly Economic Indicators series for March, Treasury said that deteriorating conditions in the international outlook, and uncertainty surrounding both domestic and international conditions meant that there was a wide range of possible outcomes for growth at this time. "Looking ahead, weakness in construction and manufacturing as well as weak business capital expenditure are expected to put downward pressure on the economy," Treasury said. "On the positive side, monetary and fiscal stimuli in place, a competitive exchange rate and an improvement in the net inflow of migrants are expected to contribute positively to economic growth." The New Zealand dollar reached an 11 week high on Monday, but fell overnight and on Tuesday following a fall in global equities and the release of the NZIER survey (NZD/USD was around 0.5800 at time of publishing, down from the high of 0.5978.) "Developments in the global economy will continue to be critical for New Zealand, especially through their effects on access to credit, the value of the New Zealand dollar and the demand for exports," Treasury said. "One important factor that will affect the performance of the external sector and the New Zealand economy as a whole in 2009 will be world demand. March Consensus Forecasts showed the economic activity of New Zealand's trading partners is forecast to contract by 1.8% in the 2009 calendar year. This is a big revision from the forecasts for trading partner growth in February of -0.9% for 2009." Treasury said that talks with businesses over March, mainly large firms, supported its view that growth would be weaker than the December downside scenario. "In general, firms are responding to the weak conditions by cutting costs, reducing investment and generally being more conservative in their business decisions." However, Treasury said that from the talks, it seemed liked access to credit was not a constraint on firms' activities. "On the whole, access to credit has not been restricted. However, tax practitioners' comments and some small and medium-sized enterprises noted increased difficulty accessing short-term funding for working capital at a reasonable price. However, borrowing costs have decreased for most as lower benchmark rates have more than offset higher spreads on bank lending and higher facility fees."