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ECONOMY AGAIN SURPRISED IN 2007 THANKS TO DAIRY BOOM
(New Zealand Press Association Via Thomson Dialog NewsEdge) As with every year this century, 2007 began with economists predicting a slowdown that never eventuated. Although not a boomer year, it proved better than expected. SIMON LOUISSON OF NZPA reviews the economy over the year and looks at the prospects ahead.
Wellington, Dec 28 NZPA - Each year this decade economists practising their dismal art have forecast the economy to slow, only to find it repeatedly revealed surprising resilience.
This year's surprise came from dairy prices, which essentially doubled.
Although the world economy was been shaken by a bank credit crunch precipitated by the United States subprime mortgage crisis, commodity prices soared due to the ongoing expansion of the booming Chinese economy.
And despite the housing market tanking in America and banks stacking up staggering losses from the complex leverage finance deals, the US economy has remained strong.
But it is China's growth that has largely driven world growth. It is behind the rise in world oil prices to a record $US100 ($NZ133) a barrel, which caused the US and other nations to switch to biofuels, and that in turn gave a further fillip to food commodities such as dairy products.
Dairy exports already comprised 20 percent of the country's exports, but by next year will leap by over $3 billion to $8b to 25 percent.
Treasury and the Reserve Bank now forecast economic growth at a respectable 3 percent in the year to March 2008, although again they are predicting it to slow a bit through the year.
Certainly there have finally been signs of slowdown in the domestic economy as higher interest rates and petrol prices started to bite.
Reserve Bank governor Alan Bollard has struggled all year to keep the inflation genie in the bottle. Soaring oil prices and the secondary effects of that, a strong labour market that encouraged wages up and pressure from the wealth effect of continued buoyant house prices have all exacted their toll.
Having left the Official Cash Rate at 7.25 percent all last year, Dr Bollard was forced to hike rates four times mid-year.
Pressures from almost every quarter means inflation is forecast to be over the target band of 1-3 percent band all next year, and several leading economists don't think he is done tightening.
The problem with high interest rates they push up the exchange rate as investors chase New Zealand's high yield.
Almost every currency forecaster had predicted the kiwi dollar would fall to around US60 cents this year. Instead, it soared to US81c in July, its highest level since it was floated in 1985. That prompted Dr Bollard to exercise his freshly granted power to intervene in the currency market.
He sold over $2b in June and July and, for a time, it appeared successful.
The intervention fortuitously coincided with the global credit crunch which persuaded investors to eschew risk. The kiwi dollar was placed in that category so every time equity markets went down as more bank losses were exposed, the kiwi went with it.
However, as concern about the credit crunch dissipated, and Dr Bollard turned more hawkish on inflation, the kiwi dollar resumed its climb and this month was threatening US80 cents again.
Although dairy farmers were insulated from the effects of the rising currency by rising prices, other exporters were squeezed.
Numerous exporters countered by deciding to shift production to China and elsewhere, including iconic companies such as washing machine maker Fisher & Paykel and garment maker Swanndri.
Despite the factory closures, the job market remained buoyant and the labour market extremely tight.
The unemployment rate as measured by the Household Labour Force Survey, fell to 3.5 percent -- its lowest since the survey began in 1986 and one of the lowest rates in the world.
As well, the workforce participation rate rose to a record 68.8 percent as more people, particularly women and older folk, took jobs or remained in them.
But for the first time since the Labour Government came to power in 1999, the number of fulltime jobs fell over the year -- down by 4000 from 1.664 million in the September quarter 2006.
The strong job market meant households kept spending, retail sales held up, business profits were robust and the Government's coffers again burst to over-flow.
The budget surplus forecast in May at a whopping $6.4b was lifted by another billion dollars by year-end.
The Government was finally persuaded that year after year of better-than-forecast economic performance, and therefore budget surpluses, meant tax cuts were affordable.
At least $1.5b has been set aside for cuts in early 2009 and Finance Minister Michael Cullen hinted a second and even third round of tax cuts could follow.
The one really ugly stain on the economic landscape remains the current account deficit, New Zealand's balance sheet with the rest of the world. Already at an alarming 9 percent of GDP at the start of the year, it showed little sign of improvement due to the high dollar and despite terms of trade being their strongest for over 30 years.
New Zealand's foreign debt rose another $25b to $151b, meaning every man, woman and child owes $35,000. It is the cumulative effect of spending more than we earn and mainly the result of decades of borrowing to invest in non-productive assets such as houses.
ANZ chief economist Cameron Bagrie said the current account remains the economy's Achilles heel, particularly in view of the current fragility of the world financial system.
``In the current global environment, where risk is being repriced and credit is becoming more expensive, New Zealand's large external deficit leaves it vulnerable to a change in investor sentiment.''
From Dr Cullen and Dr Bollard down, we will all be hoping crisis will blow over and 2008 proves to be another pleasant surprise.
Still the economists continue to predict gloom.
``We remain confident that the economy will be significantly slower in 2008,'' Goldman Sachs JBWere economist Shamubeel Eaqub said after the pre-Christmans GDP figures were published.
NZPA WGT sml kn
Copyright 2007 New Zealand Press Association, Source: The Financial Times Limited
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