KEY POINTS:
ANZ National Bank economists have slashed their forecasts and now expect the economy to contract by 3 per cent this year and the unemployment rate to approach 8 per cent.
The bank was already at the gloomy end of the range of mainstream forecasters, picking a 2 per
cent decline in gross domestic product this year. Chief economist Cameron Bagrie said the view was based on the interplay of the immediate cyclical challenge and deep-seated structural issues.
New Zealand was on a "losing trifecta" of global recession, heavy reliance on overseas capital and the need to reduce debt, he said. In such an environment what got sacrificed was growth.
"We can talk about prospective interest rate cuts, expansionary fiscal policy and a potential influx of returning Kiwis all we like," he said. "But this is a major global credit event and New Zealand needs to get the current account deficit down. There is simply no painless way out of it."
The current account deficit in the year to September 2008 was $15.5 billion, adding to the country's external liabilities of more than 90 per cent of GDP - second only to Iceland among developed countries.
With world trade expected to shrink this year, earning our way out of trouble through the export sector was "not a 2009 story", Bagrie said.
"We hope our assessment for the coming year is wrong. No one likes to envisage these sorts of adjustments and outcomes."
Either it would take place sharply or over, say, five years of below-par growth or a bit of both.
The large stimulus being applied from fiscal and monetary policy would gain traction at some stage, particularly in the housing market.
But it was ironic that the housing market was being thrown the lifeline when an over-extended household sector was the seat of the problem, Bagrie said. Recovery in housing market turnover would be a first-in, first-out dynamic. Other signs of cyclical recovery would be confidence and building consents.
"But we will also be keeping a close eye on structural measures, including savings rates, the current account deficit, the composition of imports and the ratio of consumption to GDP. These are more deep-rooted indicators of sustainability that will give us the heads-up on the quality of any recovery and whether it can be sustained."