New Zealand’s finance minister warned that while the country’s 18-month recession was ending, the currency’s recent strength and rising unemployment would hamper economic recovery.
In an interview with the FT ahead of the release of the latest quarterly gross domestic product figures on Wednesday, Bill English said the country also faced challenges to restore government finances with public debt forecast to reach NZ$80bn ($57.6bn) by 2015-16.
New Zealand was one of the first developed countries to enter recession when its economy started shrinking in early 2008. The downturn helped oust the Labour government of Helen Clark, which was replaced by John Key’s National party.
The small southern nation is heavily dependent on trade, with about 30 per cent of GDP generated by exports. The recession has also highlighted structural problems, including low household savings and large overseas borrowings. Mr English forecast that the economy would pick up from the September quarter.
“We need an engine of growth and that will have to be exports, tourism and anything that competes offshore,” Mr English said.
But he warned that New Zealand’s dollar, which has surged from just under $0.50 in March to a 2009 high of $0.72 on Tuesday, was a big concern. The currency has been the best performer in Asia against the US dollar this year.
“The Kiwi dollar is not a one-way bet,” said Mr English, adding that the central bank had signalled interest rates would be kept at about 2.5 per cent until late 2010, in contrast to Australia where rates may move higher in months.
New Zealand on Tuesday reported a bigger-than-expected fall in the current account deficit, which fell to NZ$10.6bn for the 12 months ended in June, compared with NZ$14.6bn for the year ended in March.
“The one positive aspect of our export outlook is that before the global recession there was strong demand out of Asia based on the growing middle classes who were interested in buying our food products,” added Mr English. “It’s likely that demand will pick up again.”
“The other strength is the Australian economy [which] is doing fairly well, and they are our biggest single market.”
Growth in Australian tourists has helped salvage the country’s tourism trade at a time when Japanese, Korean and Chinese visitors are down at least 30 per cent.
Mr English said that while the US and UK export markets would “take a while to come right”, he was optimistic about China. New Zealand last year became the first developed nation to sign a comprehensive trade agreement with China.
“We want to focus on exploiting the free trade agreement. When we look at the export scene, this is a big market that’s picking up strongly and we have good access to it and we need to take advantage of it,” he said.
The New Zealand government expects unemployment to rise from 6 per cent to 7.5 or 8 per cent next year, less than the OECD’s forecast of 8.5 per cent.
But the cost of the recession will be felt for years. It could be a decade before New Zealand’s budget returns to surplus, and public debt will double to about 40 per cent of GDP in the next five years.