Treasury sees growth even worse than December downside scenario

Treasury announced risks are increasing that economic growth over the next two March years will be below the downside scenario in its December Update, which forecast GDP to shrink 0.2% in 2009 and 0.3% in 2010. Consensus forecasts for New Zealand's main trading partners' growth have also been revised below the December downside scenario. "There is a wide range of possible outcomes for growth at this time, with large uncertainty surrounding both domestic and international economic conditions," Treasury's forecasting team said in its Monthly Economic Indicators report for February. "The slowdown of the economy continued as both domestic and international economic conditions deteriorated. Data released in February showed weak retail sales growth in the December quarter, a weakening housing market, an increase in unemployment, and further declines in commodity prices," Treasury said. "There are pressures on both households and firms, with indicators of both consumer and business confidence continuing to fall in February. These conditions, combined with easing of inflationary pressures, are expected by markets to lead to more cuts in the OCR, following further cuts by other major developed economies that brought their policy rates to record lows." Treasury forecast in its downside scenario that unemployment would rise to 7.2% in 2010. Treasury said the economist consensus forecasts of global growth had been scaled back from January forecasts by 0.6% to a contraction of 0.8% in 2009. The consensus forecast for New Zealand's main trading partners has been revised back to a contraction of 0.9% in 2009, followed by expansion of 2.2% in 2010. These are below Treasury's December downside scenario. "The prospects for global economic growth remain uncertain, reflecting the exceptional economic and financial factors affecting the outlook. The risks for growth are judged to be heavily weighted on the downside," Treasury said. Furthermore, Treasury noted it expected business investment in New Zealand to follow a path similar to its December downside scenario, which was for it to decline by 24% in the year to March 2010. "Business investment is one of the most cyclical components of GDP (along with residential investment), making judgements about its growth in the short term important in forecasting the extent of the current recession," Treasury said. "The main determinants of business investment are current and expected demand nsusfor a firm's outputs. The latest Quarterly Survey of Business Opinion (QSBO) showed that business confidence and firms' own activity in the December 2008 quarter and their expectations for the March 2009 quarter were all at their lowest levels in seasonally adjusted terms since at least 1970." "The weak outlook for activity, combined with limited ability to pass on large input cost increases because of the weak demand, led to a fall in expectations of profitability to its lowest level in 26 years. As a result, intentions to invest in plant and machinery fell to their lowest level since 1975." "The cost and availability of finance are also relevant to investment decisions. Recent falls in interest rates have made it cheaper for New Zealand businesses to borrow, but the reduced availability of credit and tighter lending criteria may restrict credit growth." "Lower interest rates may encourage some firms to invest; for others, however, they are unlikely to outweigh the weak demand they face."