Thinktank: New Zealand economic recovery will be slow

Aug 31, 2011, 1:59 GMT

Wellington - New Zealand9s economic recovery from a double-dip recession and the earthquakes earlier this year will be slow and gradual, an influential thinktank said on Wednesday.

While the economy is on the mend, weak global growth is threatening the recovery, the New Zealand Institute of Economic Research (NZIER) said in its latest quarterly predictions.

'An abrupt slowdown in the Australian economy, renewed recession fears in the United States and a spreading sovereign debt crisis in Europe will soften global growth,' principal economist Shamubeel Eaqub said.

He predicted the New Zealand economy would grow 1.4 per cent this year, and 2.6 per cent in 2012. 'This is consistent with a slow and gradual economic recovery, with continued deleveraging.'

The NZIER said the central bank should not raise its benchmark interest rate of 2.5 per cent for some time while the global economy is so vulnerable and the exchange rate of the New Zealand dollar, currently worth 85 US cents, is so high.

Predicting that the Reserve Bank would not raise the interest until June, Eaqub said increases should be delivered cautiously as 83 per cent of home mortgages were short term.

'Even a 1 per cent interest rate increase will raise the annual mortgage bill by 1.4 billion New Zealand dollars (1.2 billion US dollars) or 2.2 per cent of annual retail spending.'

Eaqub said the Christchurch regional economy may be permanently smaller as a result of the earthquakes which hit the country's second-largest city in September and February, with 26,000 private sector jobs lost and about 2,000 residents emigrating.