1 Dec 2011

NZ recovery threatened by global deterioration - NZIER

7:09 am on 1 December 2011

The Institute of Economic Research says the rapid global economic deterioration is threatening New Zealand's recovery and interest rate hikes won't be on the cards until mid 2013.

In its latest quarterly predictions, the institute forecasts the economy will grow by 1.5% in 2012, rising to 2.5% by 2014.

The institute's principal economist Shamubeel Eaqub says the global economy has worsened significantly in the last three months and the rebuilding of Christchurch has been delayed further.

Mr Eaqub says it's a difficult time to try to forecast what's likely to happen.

He says the institute's forecast assumes things are tough in Europe but the situation doesn't fall apart, and that there is some slowdown in global growth but not an outright recession.

Mr Eaqub says if that's correct, there's likely to be a similar outcome for the New Zealand economy to what has just occurred.

"Very flat, not much momentum in the economy and things don't feel much better until 2013 - 2014", he says.

Mr Eaqub says the Reserve Bank must not raise interest rates any time soon.

"So we think the first rate hike will not be before the middle of 2013, but if the situation in Europe worsens then we can see a clear case for interest rate cuts", he says.

Mr Eaqub says the slower recovery will also dampen tax revenue, making the Government's plans to return to surplus in 2014 - 2015 even more challenging.