7 Dec 2010

Treasury warns of economic flat patch

7:34 am on 7 December 2010

The Treasury says there is little prospect of a stronger and durable economic recovery, until business investment picks up.

In its November economic indicators report, the department notes the economy is in a flat patch, with retail sales ebbing after a GST-inspired splurge, while credit growth and the housing market has stalled.

The Treasury says consumer spending remains subdued, and higher food prices, caused by the rise in GST, will restrain households, which makes up 60% of economic activity.

It says other parts of the economy will have to drive growth.

One of the country's bright spots has been the export sector, which has benefited from strong demand from Asia for food exports, like dairy products.

But Treasury cautions drought will limit production, and commodity prices may fall due to China dampening its economy to curb inflation.

The department says business investment is crucial to lift growth, and its heartened by the strongest rise in business credit in November in two years, of 0.9%, though it's still below the same period a year ago.

And while it's still too early to say firms are feeling more optimistic, Treasury notes that strengthening business confidence points to a more vibrant economy over 2011.

Separately, a lower tax take has widened the Government's deficit to $4.4 billion.