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Economists cautiously optimistic; service sector buoyant

Economists cautiously optimistic; service sector buoyant
Economists are revising their outlooks upwards – despite the ongoing global uncertainty – driven in part by the Canterbury rebuild. Meanwhile, the service sector has been buoyed thanks to plenty of new business.

GDPEconomists are revising their outlooks upwards despite the ongoing global uncertainty, driven in part by the Canterbury rebuild.

Those surveyed by the New Zealand Institute of Economic Research on average believe the economy is set to recover and have adopted a somewhat more optimistic view of the two years ahead.

Economic growth will accelerate from 1.5 percent in the year ending March 2011 to 2.6 percent in 2012 and 3.7 percent in 2013, according to current estimates. The Canterbury reconstruction will be the major driver, with a more modest recovery elsewhere.

NZIER principal economist Shamubeel Eaqub said international fears do not appear to have impacted on New Zealand economists’ expectations much as yet.

GDP is tipped to grow by 0.5 percent in the June quarter (data is due out on Thursday). The dollar is also projected to stay high, reducing export competitiveness.

While the Canterbury reconstruction will provide a sizeable impetus, particularly to the construction sector, economists are uncertain on the actual timing and speed of reconstruction. Forecast residential construction growth ranges from 24 percent to 59 percent in the March 2013 year and the rebuild will start later than thought in June.

The current account balance is expected to deteriorate, reversing the improvement of the past two years. Forecasters expect a current account deficit of $8.6 billion in 2012, deteriorating to $13.7 billion by 2014.

"A widening current account deficit reflects insufficient domestic savings to fund investment in the economy. This can be a source of economic vulnerability when global investment appetite sours."

Surveyed economists expect inflation to average 2.7 percent over the next three years, near the top of the RBNZ’s target band. However, international turbulence mean rate hikes are likely to be from early 2012.

Service sector buoyant

In the latest indicator of economic recovery, healthy levels of new business kept the service sector in expansion for August, according to the most recent BNZ-BusinessNZ Performance of Services Index (PSI).

BNZ economist Craig Ebert said these were consistent with a number of other surveys that have proved remarkably robust.

The PSI for August was 53.9, down 0.6 points from 54.5 in July but the highest August result since 2007. A PSI reading above 50 indicates that the service sector is generally expanding.

BusinessNZ chief executive Phil O’Reilly said the figure was boosted by ongoing solid results for new orders and sales.

“Although employment and stocks showed contraction in August, new business and activity pulled through again with levels of expansion similar to both June and July. Also, it is pleasing to see that recent influences on business activity are constructive, with the proportion of positive comments left by respondents in August (58.8 percent) increasing significantly from July (50 percent),” he said.

“Looking ahead, time will tell whether the recent kick-off of the World Cup will help boost the service sector results further, particularly within the hospitality and tourism areas.”