Economy: Stronger NZ Dollar Threatens Growth In 2004

Despite the combined buffeting of a strong currency appreciation, SARS, a generally weak global environment and an electricity crisis, the NZ economy on reflection has shown amazing resilience in 2003. While growth has fallen from the 4.5% pace of 2002, the slowdown has been quite modest helped by strong inward migration and a booming housing industry. Growth in the third quarter rose a strong 1.5% after a 0.2% rise in the difficult June quarter, to leave the annual rate at 3.9%. Not bad for a year in which net exports subtracted around 2% from growth.

The external sector was the hardest hit by weak global demand and a stronger NZ dollar. Export volumes fell 2% in the third quarter of 2003, while imports rose 0.8%, helped by a booming domestic economy. But looking forward, the latest migration data suggests that one of the factors that has been driving domestic economic activity – namely, strong population growth – is now waning quite quickly. In November there was a seasonally adjusted net inflow of just 1,020 people, the weakest monthly inflow for over 2 years. This is down on the average net inflows of around 3,500 per month during the peak inflow period. Part of the decline is due to an increase in departures by New Zealanders on the back of a recovering world economy and some easing in geopolitical risk. But at the same time the number of new arrivals has also declined, reflecting a tightening of entry criteria. These trends are likely to continue in 2004, taking some of the heat out of both the housing market and the need for higher interest rates.