16 Nov 2015

Economic growth outlook softens

1:53 pm on 16 November 2015

The ASB Bank expects the economy to stay in a soft patch well into next year with uneven activity, rising unemployment and a need for further interest rate cuts.

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Photo: 123rf.com

The bank's quarterly economic forecasts are picking growth to keep slowing to an annual rate about 2 percent by early next year, before it starts to pick up again.

ASB chief economist Nick Tuffley said dairy incomes would be squeezed and dairy production was falling, both of which would be a direct drag on growth, while weaker business confidence and an uncertain outlook would keep businesses wary of hiring and investing.

The bank also expected unemployment to rise as more expatriates returned home and the flow of new migrants stayed high, although tourism remained a bright spot and the weakness would not last.

"We expect overall growth to slow to a low of 2.1 percent in early 2016 before gradually recovering through the twin tailwinds of lower interest rates and exchange rates," Mr Tuffley said.

Inflation was expected to remain benign and that, along with a subdued global environment, pointed to interest rates staying low for another two or three years.

"In fact, our inflation outlook is so low now that it is screaming out for us to forecast lower interest rates than we are."

The Reserve Bank was likely to cut its cash rate to 2.5 percent in December, with the risk that it cut even more next year, Mr Tuffley said.

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