Banks expect slower growth

Press, 19 December 1989, Page 28

Banks expect slower growth

PA Wellington Economic growth will continue but at a slower pace, according to two economic reports released yesterday. The National Bank/Centre for International Business Cycle Research’s leading index of economic activity fell 0.2 percentage points in September, dropping the index’s measure of the rate of annual growth to 4.4 per cent from 5.6 per cent in August. The leading index’s growth rate appeared to be slowing down, with the latest result confirming negative trends since May, the bank said in its latest Leading Indicators newsletter.

“This in turn creates further doubt about the sustainability of the present recovery in economic activity. “The high interest rate environment which reflects inflation expectations as well as the stance of monetary policy, and the likely flow- on effects of these on the exchange rate, make a pick-up in the pace of economic activity over the next three months all the more unlikely”. Overcoming the continuing fall in the share price index, which is used to calculate the leading index, would be difficult, it said.

The leading index is used to predict future movements in the accompanying coincident index, which measures the economy’s movement over the next three to six months. The coincident index showed no change from the previous month, the bank said. “It is clear from the behaviour of this index that the economy has been on a flat path over the last three quarters, excepting the aberration in June and July this year caused by the increase in the rate of GST in July”. Indicators used to calculate the leading index this month were the share price index, new building permits for non-residential construction, overseas orders for consumer goods, overseas orders for plant and machinery and new building permits issued for dwellings. The only indicator to rise significantly was the share price index. In its monthly Economic Indicators release, the Bank of New Zealand predicted a slow, stumbling recovery. The indicators painted a picture of “a recovery in economic activity that is so slow and hesitant that pessimists keep suggesting that it either has stalled or perhaps never really began,” the bank said.

While it was forecasting more positive news over the next six to twelve months, the bank was not expecting the sort of pattern evident in the past of “an excessively strong upswing, followed by an inflation/exchange/ interest rates crunch, and a subsequent downturn”.

BNZ predicted the economy would progress from the current weak recovery, through a period of consolidation, towards the prospect of “sustainable non-inflationary longer-term growth”. Likely developments next year included: • A slow pick-up in consumption as ruralbased recovery gathered strength and activity in the Auckland area improved. @ Inflation peaking around 7 to 8 per cent in March, then falling to around 3 to 4 per cent by December. • Falling interest rates as the domestic money market absorbed the part-financing of Government asset sales and responded to a sharp fall in the Government’s own financing requirements. • Unemployment gradually reducing but remaining high. • Further restraint on government spending and strengthening farm investment and residential construction.