Economic scars set to fade over 2011

New Zealand’s slow economic recovery is likely to make more progress in 2011 than in 2010, according to the latest ASB Quarterly Economic Forecast.

ASB Chief Economist Nick Tuffley says 2011 will hold similar economic themes to last year but will hopefully serve to better heal the wounds inflicted by the recession in 2008 and 2009.

“The strength of emerging economies will support the global economy, even as many developed countries struggle to make structural adjustments to promote growth,” he says. “Meanwhile, New Zealand households will continue to spend within their means. New Zealand is starting along the path to a more balanced mix of growth, although the challenge will be improving our export performance on a more sustained – and broader – basis.”

Mr Tuffley says that over 2011 New Zealand’s trading partners will grow at a pace around the long-term average of 3.5 percent. “Much of the economic momentum around the globe is Asia-centric, as work continues to bolster economies in the US, UK and Europe.”

“Meanwhile back home, the hands controlling the purse strings will be prudent. Government spending will be on a tight leash given slow growth in the tax base and the clear lessons being learnt from offshore economies.”

Mr Tuffley says that New Zealand households are likely to remain cautious with their money for the fourth year running. Stronger housing construction and business capital expenditure over the year is likely to give the recovery more impetus, over and above the impacts of the Christchurch earthquake.

“Another buffer for the economy is the likelihood of commodity prices remaining fairly firm over 2011 as Asian demand for New Zealand exports continues to grow,” he says.

Interest rates are likely to stay low for much of the year, as the Reserve Bank is set to take a very cautious approach to removing monetary policy stimulus.

“A very important lesson from 2010 was that both businesses and households were reluctant to spend even at relatively low interest rates. That may change in time, but until it does such self-restraint will keep the lid on inflation,” Mr Tuffley says.