Treasury: Recession may be over

Rising consumer confidence is one of the factors the Treasury is pointing to as a sign of our economic recovery. Photo / Glenn Jeffrey

The recession may be over and unemployment is not likely to reach previously expected heights, says the Treasury.

It bases its upbeat predictions on the international recovery, positive migration figures, rising business and consumer confidence and an improving housing market.

In their August Monthly Economic Indicators, published yesterday, Treasury economists said international figures pointing to "an improved global outlook, but still fragile recovery".

That was likely to fuel a stronger domestic recovery, assisted by higher migration and increasing confidence.

The Treasury expects the June quarter to be "the last quarter of contraction", and it is predicting a small amount of growth in the current quarter, which ends this month.

"Signs of growth in the economy mean it is likely that activity levels and labour demand will exceed those in the Budget forecasts.

"This is likely to result in a lower peak in the unemployment rate - perhaps around 7.5 per cent next year, compared with a peak of 8 per cent in the Budget forecasts."

In the June quarter, unemployment rose to a nine-year high of 6 per cent, and the actual number out of work reached a 10-year high of 138,000.

All else being equal, the Treasury's revised estimate is for 34,500 fewer jobless than its 8 per cent forecast, although UBS economist Robin Clements says changes in the size of the labour force mean such calculations are prone to inaccuracy.

He forecasts unemployment peaking at just over 7 per cent and says the Treasury's 8 per cent Budget forecast "was always a bit alarmist".

Treasury economists and some at the trading banks had initially underestimated the scale of the recession, and so may have subsequently been overly pessimistic "to make sure you're covering the worst-case scenario".

"And if it turns out better, good."

Mr Clements said that although the recession might be over in a technical sense, a more tangible recovery would not happen until next year.

The Treasury yesterday echoed recent concerns that the quality of the current recovery - in which housing is playing a big role - is questionable, saying the stronger growth may prove to be unsustainable.

The Treasury's document examines the reasons for the housing market recovery and the implications for its economic forecasts.

It says the recent strength stems from reduced house prices and construction costs, falling borrowing costs and improved loan availability, improving household confidence and strong net migration.

"But beyond the short term, slowing wage growth, high levels of household debt, an expanding supply of houses for sale and rising interest rates will forestall a return to the rates of house price inflation seen earlier in the decade."

But investment in residential property could play an even more prominent role than forecast in next year's expected recovery.

Mr Clements said some recovery in the housing market was required "but beyond that you don't want it to be a major driver of growth because we've seen what happened ... with house prices taking off and people spending up and borrowing on the back of it".

Among other bank economists, ANZ's current forecast is for a 0.6 per cent fall in GDP for the September quarter and modest growth over the next two quarters before a dip back into negative territory from March.

ANZ is expecting unemployment to continue rising to 7.6 per cent in September next year.

Westpac expects unemployment to peak at 7 per cent next year, and the BNZ is forecasting 7.3 per cent.