New Zealand: Country Economic Forecast: 20 Apr 2012

GDP rose just 0.5% in Q4 and growth slowed to 1.4% in 2011 overall as global headwinds held down investment and exports. The pick-up in construction after the two earthquakes will help growth accelerate to about 2.5% this year, but subdued global activity, a rising current account deficit (seen at over US$8bn this year) and plans to cut the fiscal deficit will mean only a modest pick-up in growth in 2013 to just over 3%. Base effects saw inflation slowing sharply in Q4 last year, down to 1.8% from 4.6% in Q3, and there was a further slowdown to 1.6% in Q1 this year. Core inflation has been more stable, at around 2% (the mid-point of the RBNZ target range of 1-3%). We expect headline inflation to average just over 2% both this year and next. Improving inflation prospects have enabled the RBNZ to keep interest rates on hold since April last year. Given the fairly tepid growth prospects, and with rates in Australia expected to fall again soon, it now seems likely that the RBNZ will keep rates on hold for the rest of this year. Tighter fiscal policy, aimed at returning the budget to surplus by 2014/15, will restrain growth over the medium term despite an improving global backdrop. But containment of the budget and current account deficits will in turn improve the conditions for private investment, helping to keep the growth rate at around 3% in 2014-15, with a gradual pick-up in export growth stabilising the current account deficit.