'Sluggish' growth as Bollard holds OCR at 2.5%
Less worry about Europe, more worry from the currency, and greater restraint from lower government spending sums up the Reserve Bank's outlook this morning.
As expected, outgoing governor Alan Bollard kept the official cash rate at 2.5% when he reviewed the rate in today's quarterly monetary policy statement.
Forecasting continued "sluggish" economic growth, Dr Bollard says the risks from the eurozone are now "limited" but the high New Zealand dollar is undermining the export sector.
Growth has yet to return to pre-recession levels and is taking much longer than it has to recover than from precious recessions, the bank's monetary policy statement says.
That said, GDP growth this year is running higher than the Reserve Bank's previous forecast, having produced a 1.1% improvement in the first quarter – the bank forecast 0.4% and the highest market economist forecast was 0.7%.
Overall economic growth is forecast to rise 2.6% for the current year, an improvement on the previous outlook of 2.2%. The following two years show a small improvement of 3.1%, compared to a previous 3.0%; and 2.1% compared to a previous 2.0% outlook.
Export commodity prices have stabilised, but trading partner growth outlook is weak, the Reserve Bank says.
"Many Euro-area economies are in recession and Chinese growth continues to slow. Domestically, the unemployment rate remains elevated and the high New Zealand dollar continues to undermine export earnings and encourage substitution toward imported goods and services."
That last point stresses an important but often forgotten point about the high kiwi dollar. As well as making life harder for exporters, it can also hurt non-exporting local firms which have to compete against imports which are now cheaper.
"Import competing manufacturers who sell into the domestic market have seen their sales volumes decline markedly over the past four years, while manufactured export volumes have held up.
"The high New Zealand dollar is negatively affecting import-competing firms to a greater extent than exporters."
Stimulus from increased government spending over the 2006-11 period is now unwinding and the fiscal tightening foreshadowed in the last two Budgets is now starting to take effect.
This will – so long as the government can stick to its targets – "have a substantial dampening influence on demand growth... This consolidation will, all else equal, lead to a lower OCR than would otherwise be the case".
Offsetting that on the domestic front is the Canterbury reconstruction effort, the effect of which is now starting to show more prominently in economic data.
There has been a surge of building consents in the region over recent months, the Reserve Bank notes – more than double pre-earthquake levels for the region and 60% above pre-earthquake levels for alterations and additions.
That is still small compared to what is required, and the size and nature of the impact on wider economic activity and growth is still not clear.