New Zealand: Running out of Momentum?

New Zealand's Treasury Department voiced its concern that the nation's economic recovery may struggle to retain momemtum as indicators point to weak domestic demand.

Reuters in its report today (7 December 2009) intimated that while a string of recent data, including higher house sales, retail sales, migration gains and building consents, had shown a lift in activity, the labour market and domestic demand remained weak.

"There are risks around the sustainability of the economic recovery, as shown by the sharp decline in imports that indicates further subdued consumption and investment," the department said in its monthly commentary on economic indicators.

Weak domestic demand led to further narrowing in the merchandise trade deficit in October, as a sharp fall in imports outweighed a decline in exports, bringing the annual trade deficit to the smallest since 2002.

In a separate statement, Finance Minister Bill English said the report confirmed there were risks surrounding the recovery.

"There are some positive signs as we emerge from the recession, but the road to recovery will be bumpy," English said.

He added that a fall in capital goods imports in the past year pointed to weak business investment activity in the coming year, in addition to weak employment and salary and wage growth.

Last week, English said the government's fiscal position would reflect the impact of the recession on the tax take for some time to come after a worse than expected deficit in October.

The Treasury report said it could be up to two years before company tax revenue started to reflect the improved economy. Updated government economic and fiscal forecasts will be released on Dec 15.

New Zealand posted growth of 0.1 per cent in the three months to June 30 after five consecutive quarters of contraction. The economy shrank 1.8 per cent in the year to June 30.

A Reuters poll has a preliminary median forecast for GDP to increase by 0.4 per cent during the September quarter, the second straight quarter of expansion.

The Reserve Bank of New Zealand is expected to keep interest rates at record lows this week and reaffirm its stance of keeping them there at least until July to help tame expectations of an early end to its easing cycle, the Reuters poll indicated.