6 Dec 2011

NZ forecast downgraded because of European crisis

7:02 am on 6 December 2011

The Treasury has downgraded its forecast for economic activity because of the effect of Europe's deepening debt crisis on global growth.

The department is picking growth to be 2.6% next year, compared with the 3.1% it forecast in October.

In the near term, The Treasury says the Rugby World Cup should help underpin economic activity, while a lower New Zealand dollar will offset easing commodity prices.

Radio New Zealand's business editor says the department is predicting growth of close to 2% in the second half of this year.

But beyond that, it's less optimistic than it was in its pre-election fiscal and economic update issued two months ago.

The Treasury had assumed Europe's governments would manage the debt crisis without too much more damage to the real economy.

But the department now notes that measures taken by governments there to reduce debt have done little to quell market fears they will default.

There are signs the region is headed into recession, dragging down activity in other parts of the world, like China, which is an important trading partner for New Zealand.

That will be partly offset by the reconstruction of Christchurch, which it expects to get underway in earnest in the latter part of next year.

While commodity prices have held up reasonably well, Treasury says activity is likely to be weaker than the 2.9% it expected to average over the next four years.