Economy to pick up next year, says NZIER

By Brian Fallow

A pick-up in consumer spending will haul the economy out of recession in the first half of next year, the New Zealand Institute of Economic Research predicts.

Other forecasters, including the BNZ and ANZ National Bank, take a rather darker view, however.

While the institute still predicts the current recession to remain relatively shallow, it also expects the subsequent recovery to be more gradual than previously forecast.

That is largely because tighter credit and the lagged effect of prolonged high interest rates in recent months will dampen growth in investment, while weaker growth among New Zealand's trading partners will dampen net exports.

The institute's Quarterly Predictions, released yesterday, expect the recession - already official for the first half of the year - to have continued through the September and December quarters as well.

"In annual terms we expect the lowest point to be the year ended March 2009, when activity will contract 0.1 per cent."

But the institute expects "positive albeit modest" growth over the four quarters of 2009/10, enough to lift annual growth to 1.6 per cent by March 2010 and return to trend rates of

growth around 3.3 per cent by March 2011.

"The recovery in economic growth will be led by an upturn in private consumption in the first half of 2009, stimulated by lower petrol prices, lower interest rates, positive net immigration, wage inflation and the tax cuts in October this year and April next year."

The institute sees global economic growth strengthening in the second half of next year.

While the United States, Europe and Japan might be in, or on the brink of, recession, it points to consensus forecasts of continuing, though weaker, growth in Australia, China and the rest of Asia.

A less sanguine view is offered by the BNZ and ANZ National Bank, both of which have now joined the ranks of forecasters expecting the Reserve Bank to cut the official cash rate by 150 basis points to 5 per cent on Thursday.

"The primary reason for our shift in view is the appalling data that continue to come out across the globe. Most of the Western World is or will soon be in recession and now the pain is spreading rapidly to the emerging economies," BNZ head of research Stephen Toplis said.

"Additionally, domestic demand indicators continue to soften rapidly."

Last week's October building consents for new dwellings, for example, seasonally adjusted, were the lowest since comparable data began in 1982.

ANZ National Bank chief economist Cameron Bagrie said what had pushed him over the line to the 150-point-cut camp was the anecdotal evidence he had garnered from the bank's clients in a recent roadshow.

That was real-time information which tied in with the results of last week's National Bank business confidence survey, which were grim.

"There are clear signs of the flow-on impact from the global scene to the New Zealand economy via commodity prices and tourism," Bagrie said.

"The dairy payout has been cut from $6.60 per kilogram of milk solids to $6 for this season and further reductions look likely."

And Air New Zealand was cutting international capacity as a result of reduced demand.

Bagrie expects the economy to continue contracting during the March and June quarters next year.

BNZ's Toplis also pointed to a sharp slowing in lending to households.

October's "miserly" growth of 0.2 per cent was 2.4 per cent annualised, only half the rate recorded at the trough of the 1991 recession.

"Notwithstanding all this, we stick to our view that the New Zealand economy can slowly claw its way out of the morass as 2009 unfolds."

THE OUTLOOK

* NZIER expects the consumer to pull the economy out of recession in the new year.
* It points to the stimulus from lower petrol prices, lower interest rates, net immigration, wages growth and tax cuts.
* But growth next year will remain modest, it says.

- NZ Herald

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