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Treasury sticks by forecasts, despite Greek deterioration

Treasury sticks by forecasts it published in last month's Budget, saying while the Greek crisis has worsened the risks of lower growth its "central scenario remains valid at this stage".

Wed, 06 Jun 2012

BUSINESSDESK: Treasury is sticking by the forecasts it published in last month's Budget, saying the Greek crisis had worsened the risks of lower growth but its "central scenario remains valid at this stage".

The comment is in the economics department's latest monthly analysis of economic trends, and follows widespread scepticism about the strength of its Budget forecasts, which were signed off in late April for publication in late May.

"Downside risks have increased and our downside scenario can be seen as indicative of Greece leaving the euro area with limited contagion," commentary in the update said, although the more pessimistic Budget forecast was based on the potential for an Asian economic slowdown.

"Domestic data, for both businesses and households, are consistent with modest growth in coming quarters, before a ramp-up in the Canterbury rebuild leads to a pickup in economic activity."

The central scenario sees growth picking up from 1.6% in the year to March to 2.6% by March 2013 and 3.4% in 2014.

The main effects of global fears returning over the Eurozone was to strengthen the American dollar, in a flight away from riskier assets, and an ongoing drop in New Zealand's key agricultural commodity prices, offset somewhat by a competitiveness boost from a lower kiwi dollar.

While that sent the ANZ Commodity Price Index to an 18-month low, prices overall were still 12% higher than the average between 2000 and 2009, the Treasury said.

The update also cast doubt on expectations that the Official Cash Rate could be cut by another 40 basis points by December, and a more than 50% chance of a 25 basis points cut at this month's Monetary Policy Statement.

Lower domestic interest rates and a lower dollar "may reduce the need for the OCR cuts that the market has priced in".

Recent tumbling interest rates in New Zealand could reverse if the euro debt crisis "worsens significantly", although the Reserve Bank might cut rates to lean against a new global recession, or could "enact liquidity provisions set up during the GFC", the Treasury commentary said.

The update included commentary on the revisions to gross domestic product recently announced by Statistics New Zealand.

Most notable was the fact that there were two distinct "recessions" - first a three quarter slowdown through to September 2008 caused by the collapse of finance companies and the end of the property boom, and a further two quarters of recession caused by the global financial crisis, finishing in March 2009.

Since then, there had been at least some growth for 10 consecutive quarters, so that "the size of the recovery [3.4% or $1.143 billion] in quarterly real GDP is almost identical to the size of the contraction [3.3% or $1.154 billion], hence the level is just $11 million below its all-time high".

The revisions also showed there was less growth in 2011 than previously thought, meaning less momentum going into this year than anticipated.

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Treasury sticks by forecasts, despite Greek deterioration