Australia, N.Z. Growth Outlook Cut by OECD on Weaker Global View

Australia and New Zealand will grow at a slower pace than previously forecast, the Organization for Economic Cooperation and Development said, reflecting sustained strength in their currencies and a weaker global outlook.

Gross domestic product will rise 3 percent in Australia in 2013, still the group’s fastest-growing developed economy, down from 3.7 percent projected in May, the OECD said in a report released in Paris today. New Zealand will expand 2.4 percent next year, compared with a prior prediction of 2.8 percent, the report showed.

Policy makers in the export-driven economies are grappling with the best performing Group of 10 currencies in the past year, weaker commodity prices, strengthening property markets and fiscal tightening. New Zealand is rebuilding earthquake- devastated areas, while Australia’s central bank is trying to spur residential construction to take up slack in the economy as a mining-investment boom crests.

In Australia, “activity should remain sluggish in many sectors that must adjust to a strong dollar, and budget- tightening will damp demand in 2012-13,” the OECD said. “These factors will be partially offset, however, by easier monetary and financial conditions, which should stimulate housing investment.”

The OECD projects the Reserve Bank of Australia will lower the overnight cash rate target from the current 3.25 percent as “credit growth has remained subdued, partly reflecting households’ reduced appetite for housing debt because of rising global uncertainties.”

Rate Bets

Traders are pricing in a 61 percent chance the RBA will lower borrowing costs by a quarter percentage point to 3 percent at its meeting Dec. 4, swaps data compiled by Bloomberg show. That’s still above the near zero rates in the U.S., Japan and Europe that have encouraged buying of the Australian dollar.

In New Zealand, the central bank has kept borrowing costs at a record low of 2.5 percent since March last year to help the economy recover from quakes that rocked the South Island city of Christchurch.

“The economy is set to expand at only a modest pace with headwinds from weak external demand, a strong currency, high household indebtedness and fiscal consolidation,” the OECD said of New Zealand. It projects reconstruction from the temblors will provide “the main impetus” for growth over the next two years.

Traders are pricing in an 86 percent chance New Zealand’s central bank will hold its benchmark borrowing cost at its meeting Dec. 6, the swaps data compiled by Bloomberg show.

“As earthquake rebuilding accelerates, however, supply constraints and skills shortages are likely to boost wage and price pressures, especially in the construction sector,” the OECD said. The Reserve Bank of New Zealand “will need to monitor these developments closely and, as slack is taken up, begin removing monetary stimulus in 2014,” it said.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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