Report: Europe woes hit New Zealand's recovery

Nov 30, 2011, 21:02 GMT

Wellington - Europe's financial woes and the rapidly worsening global economy will severely hamper New Zealand's fledgling recovery, an influential think tank said on Thursday.

'The fall-out from the European sovereign debt mess will depress export growth,' said Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research (NZIER). 'It will weigh on exports and tourism, which had been a buffer.'

'Investment will remain depressed because banks will find it harder to raise capital overseas. The uncertainty around the global outlook is also weighing heavy on business and consumer confidence and thus spending,' he said.

In its latest quarterly forecasts, NZIER cut its growth forecast for next year to 1.5 per cent, down from the 2.6 per cent it predicted only three months ago.

It also said the central bank would not raise its benchmark interest rate, which stands at a record low of 2.5 per cent, until mid-2013, 12 months later than it forecast earlier.

Eaqub said the NZIER assumed a political solution would be found that prevented the Euro area from breaking up but New Zealand's economic growth is now not expected to climb above 2 per cent until 2014, when it could gradually rise to 2.5 per cent.

But he warned, 'If the Euro area splits, New Zealand firms should prepare for another global crisis. This would restrict access to capital and push up global borrowing costs, in addition to an even weaker export outlook.'

'New Zealand would likely experience another recession and the Reserve Bank would need to cut interest rates. We place the odds of such a scenario at about 25 per cent,' he said.

There has been little growth in domestic demand, he said.

'Households are saving, the housing market is struggling, businesses are cautious about investing and the government is in a period of fiscal consolidation.'