26 Nov 2008

OECD predicts NZ economy will shrink

6:35 pm on 26 November 2008

The Organisation for Economic Cooperation and Development says economic activity will contract next year in New Zealand.

It forecasts the economy will shrink 0.3% in 2009, compared with its previous forecast of growth of 2.1%.

The OECD says New Zealand is well placed to cope, as declining interest rates, tax cuts and increased government spending will offset the worst effects of the severe global downturn.

Inflation will fall from 4% this year to 2.3% next year. It has already hit 5.1% in the year to 30 September - its highest for 18 years.

Growth is not expected to bounce back strongly in 2010, as high household debt and a large current account deficit weigh on the economy.

The OECD notes the year has so far seen a sharply slowing housing market, job losses and a large current account deficit, which will take time to be resolved.

The Reserve Bank of New Zealand has already cut the Official Cash Rate by a total of 175 basis points since July and is expected to do so again by at least a further 100 basis points to 5.5% on 4 December.

Australia is forecast to fare better, with the economy expanding 1.75% next year and 2.75% the year after.