NZIER waves shroud on Christmas season

Not so fast Santa. Double dip recession remains a possibility for the NZ economy, says the NZIER. Photo / Thinkstock

A double dip recession remains possible for New Zealand, with a recent slump in house sales indicating a tough Christmas for businesses and households, says the New Zealand Institute of Economic Research in its latest quarterly forecasts.

A sustained and more broadly based economic recovery is still anticipated in the latter half of next year, but for now "the economic recovery has reversed," says NZIER's principal economist, Shamubeel Eaqub in a statement this morning releasing its December quarter forecasts.

Consistently gloomy this year, NZIER has also been proven broadly right in its fear about the weakness of the cyclical elements of New Zealand's economic recovery after the global financial crisis.

"We expect wintry economic conditions this summer," said Eaqub. "Critical indicators like house sales and domestic trading activity point to a slow finish to the year, even without the destruction and disruption of the Canterbury earthquake in early September.

"A double dip recession cannot be ruled out, but it is not our central scenario. Instead, we expect weak activity over coming months, before a more sustained recovery from mid 2011."

While the weak economy means the Reserve Bank can wait until June next year before raising interest rates, NZIER warns that the New Zealand dollar exchange rate is likely to remain elevated because of global "currency wars", and that there will be little that policy-makers here can do to stop that.

NZIER is forecasting an anaemic 1.7 per cent rate of economic growth this year, rising to 2.3 per cent and 2.9 per cent in 2011 and 2012 respectively.

The forecaster says "the recovery will be shallow and volatile", and that the global outlook remains "full of risks" and they are rising.

"Quantitative easing, fiscal austerity and bail outs are prevalent. The solution to the GFC is less spending and more saving. This will hurt the demand for our exports: 41 per cent of New Zealand's exports go to countries with public debt in excess of 50 per cent of GDP," said Eaqub.

"Businesses should plan for a shallow economic recovery. Economic activity will be weak through late 2010 and early 2011, but we expect a more sustainable and broad based recovery from mid 2011.

"For businesses with tight capacity this is the time to invest; to capitalise on a more sustainable recovery from mid 2011. For those with excess capacity, it will be a case of prudent risk management in the soft patch."