Reserve Bank upbeat on RWC; more ambivalent on economic outlook

The Reserve Bank has a firm prediction for the Rugby World Cup – but everything else is a bit murky.

Governor Alan Bollard ended his annual speech in Christchurch this afternoon with a tongue-in-cheek forecast for the rugby from the central bank’s economics team: the average forecast is for New Zealand to beat Australia in the final by 23.9 to 15.6.

As for the economy: we could have a good year but equally we could have a bad one.

As well as a long list of the usual uncertainties, which seem more uncertain than usual – oil and food prices; an exceptional array of “doom” or “boom” scenarios for the US; a possible slowdown in China; sovereign debt hitting crisis point, especially in Europe being just some – and there is also New Zealanders’ greater appetite for saving rather than spending.

"We have little from history to guide us about how enduring or deep these changes may be. In addition, the recovery has been rocky and fragile," he said.

If this is a long term shift then, although it will be tough on the domestic economy – especially the housing, construction and retail markets – interest rates would stay lower for longer.

"Under this scenario, the Reserve Bank might have to reconsider some further monetary policy stimulus. Such restrained spending would keep domestic demand in check for two to three years, constraining growth short-term but building a stronger base for long-term growth."

In the shorter term, there is a good case for a strong economic rebound this year after a “disappointing” 2010, he said.

“Commodity prices have reached very high levels, driven by emerging market demand. These high commodity prices generate stronger export revenue and provide a much-needed boost to incomes.

“However, farmers continue to use this income boost to repair balance sheets. Indeed the business sector, broadly speaking, continues to behave cautiously, opting to rebuild company balance sheets rather than take on new investment. We think that investment will start to pick up in the second half of this year as confidence returns, but it is by no means clear how persistent business caution will remain.”

Construction, while remaining soft, should pick up especially as the Canterbury rebuild gets under way.

“There are many estimates but we think that earthquake-related construction spending will add at least $5 billion to New Zealand’s nominal GDP.

“While essential infrastructure rebuilding will be frontloaded, our business contacts suggest much of the commercial rebuild may be a prolonged process lasting several years. All else being equal, this will add some pressure to prices and the exchange rate,but we think this is manageable.”