International insight hot spots: New Zealand. (International Affairs Section).

Some downside risks to the economy have emerged since the September 1 11th terror attacks in the United States, which include a still-deteriorating international environment for New Zealand's exports, damage to the important tourist industry, and serious problems for Air New Zealand--against the backdrop of lingering effects of drought in agriculture. Business confidence slumped during October to where 35 percent of respondents to the latest survey indicated that they expect conditions to worsen in the coming year, against only 16 percent saying that they are looking for an improvement. The gloomy sentiment was reflected across the board, in the outlook for profits, investments, and hiring intentions. Investor confidence has also fallen sharply since September 11th.

Consumer confidence, however, which took a dive in September, rose a little in October, suggesting that a measure of optimism may be returning. This may be, at least in part, due to the fact that seasonally adjusted unemployment remained at a 13-year low of 5.2 percent of the labor force in the September quarter. Moreover, the New Zealand Reserve Bank (RBNZ) cut the official cash rate by half a percentage point on November 14th, to 4,75 percent, following a similar paring on September 19th. In announcing the reduction, the fifth so far this year, the Bank indicated that it is quite prepared to consider a further pruning if business conditions continue to worsen, (The RBNZ's next rate review is scheduled for January 23rd.)

All in all, the GB has lowered interest rates by an aggregate 1.75 percent since last January. It has, thus, been considerably more cautious than the U.S. Federal Reserve, which began the year--like the RBBZ-with its key rate at 6.5 percent, but has brought Fed funds down to 2.0 percent. Importantly, though, the U.S. dollar has been exceptionally strong and has acted as a draganchor on the U.S. economy, while the New Zealand dollar has declined against the USD by a little over 5 percent this year and by close to 20 percent since the outset of 2000. The weakness of the currency has gone a long way in helping to maintain the volume growth of exports and the forward momentum of the whole economy.

Real GDP growth in the first two quarters of 2001, at 2.3 percent, was stronger than officials al the Central Bank had expected. Also, many businesses have continued to prosper since then, the housing market is well ahead of last year thanks to low interest rates and a turnaround in migration flows, and export prices, while they are declining, are still above last year's. On the whole, the economy has lost momentum in recent months, but it remains sound and will be seriously hurt only if the international slump proves to be both deep and prolonged.

The Reserve Bank, in its most recent assessment, forecast real GDP to grow by 3.0 percent in the year through next March, but then to gain by just 1.5 percent in the following 12 months. We see a 2.5 percent increase as more likely for 2001/2002, and expect a similar rate of growth for 2002/2003. Domestic retail sales rose by a noteworthy 1.3 percent in the June quarter and by another 0.6 percent in the three months through September. Inflation has remained quite moderate and is currently just above the RBNZ's 0 percent - 3 percent target range. ...