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Early indications of an economic recovery might not be as strong as many people hope, Treasury said today.
Treasury's October monthly indicators showed the outlook for world economic growth had lifted in recent times, with credit conditions easing and both commodity and equities prices rising.
In New Zealand growth appeared to have strengthened over the September quarter, with activity and business and consumer confidence increasing,
However most of the economic optimism was due to businesses looking forward, while the economy remained weak.
"There is a risk that expectations will fail to be realised so that the recovery is not as strong as the indicators suggest," the paper said.
Treasury is picking the economy to grow by 2 percent over the second half of 2009.
The pick up in domestic demand had been seen with house sales rising and an increase in the number of building consents.
Retail spending remained subdued, but private consumption was expected to increase modestly, with low interest rates and rising immigration supporting demand.
Exporters were getting better commodity prices, but the gains were being offset by the exchange rate.
"Overall the economy has continued to build on the tentative end to the recession suggested by the 0.1 percent rise in the June quarter GDP," Treasury said.
"The exchange rate...remains a major impediment to a greater contribution from exports to the recovery."
Inflation at 1.7 percent was higher than expected especially with price increases in imports which normally would have become cheaper due to the higher dollar.
Both exports and import values were down sharply compared to a year ago, driven largely by a fall in dairy prices.
Treasury said imports had dropped faster than exports and this could lead to the first merchandise trade surplus in seven years in 2010.
The signs of the world economy recovering more quickly from recession than initially expected were tempered with concerns that the long-term growth would be weaker.
This was due to householders keeping their wallets closed and looking to pay off more debt, unemployment remaining high and the need at some point for governments to turn off the fiscal stimulus funding tap currently flowing.