NZ set to benefit from food frenzy

Surging world demand for food offers New Zealand its best economic prospects for more than 40 years, a new study finds.

However, a fundamental change to the Reserve Bank's inflation targeting is needed urgently to reap the full benefits, it says.

A "cursory analysis" of the bank's forecasts suggested 95,000 fewer jobs over the next three years - equivalent to $7.4 billion of gross domestic product, economic forecaster Berl said.

The global economic balance had undergone a fundamental shift, with rising food prices fuelled by the burgeoning economies of China and India, while the outlook for manufactured products was flat. It was not a temporary phenomenon.

Helping New Zealand were extremely favourable terms of trade, robust markets in Australia and China, income tax cuts and a continued surge in public sector investment spending.

However, despite long-term positives, there was "significant vulnerability to more negative 'sentiment' shocks in the immediate short term".

But for the first time since the end of World War II New Zealand had experienced a long period when the prices of its goods had moved in its favour. Terms of trade were the best since late 1966.

Bill English, National Party finance spokesman, agreed: "The balance of [world] economic growth is shifting toward us, not away from us." The dairy boom was helping avert a deep recession and "we have something other people don't. Water".

CTU economist Peter Conway agreed the medium-term outlook was very positive. The biggest challenge was getting exports to market with high fuel prices.

"The things to do are the sort of things we are trying to do. Such as sustainability - showing we were growing with a small carbon footprint - and bread-and-butter ways of developing exports."

That included developing the workforce and workplace practices to help add value.

Berl said, however, the single focus on inflation needed to change. At least equal emphasis should be given to factors such as exports, employment or the balance of payments.

Included in Berl's report is an open letter to the incoming minister of finance after the election, urging change and asking: "Are you happy to continue to `buy' price stability at the cost of a perennially underperforming economy?"

Berl senior economist Ganesh Nana said the cost of pursuing low inflation was not even registering with officials, policymakers and advisers.

But Mr English rejected any change to current settings.

"It's not the time to relax on inflation whatever the short-term political advantage there may be.

"If ... National wins we hope to stick to business as usual and not rewrite the policy targets agreement as has happened every election since 2005."

Most economists expect data next week to show the economy shrank in the first quarter.

Finance Minister Michael Cullen said New Zealand faced the most difficult global economic picture in at least a decade, and potentially since the late 1980s.

Today he intended to issue background papers showing he rejected tax cuts both bigger and smaller than the $10.6 billion package in the May Budget.

He called the Budget a "genuinely counter-cyclical Budget that will responsibly stimulate the economy when that stimulus is needed".