Editorial: Work to be done before dark days over

Opinion

The recession is "done and dusted" according to one of the upbeat commentaries from economists this week. Certainly the contraction has eased, as evident yesterday in the 0.1 per cent growth in economic output recorded for the three months to June 30.

And there is every reason to expect that when the figure for the current quarter is available it will show a further improvement. But "done and dusted"?

The recession will be done and dusted when the debts it has left in the public accounts have been cleared and the financial system has undergone a fundamental repair.

The debts present an inflationary threat that will make the recovery slow, if central banks act in time to meet the threat, or turn into a destructive force if they fail to act in time. Either way, the effect of the recession is going to be felt for a while.

For the moment, though, there is cause for celebration. The return to growth in the June quarter, even by the most slender margin, is better than we had been led to expect.

The figure comes with a warning from Statistics New Zealand that it is too small to be taken as a sign of recovery. These results are often revised when more data arrive but this one accords with experience. The country seemed a little less worried through the winter.

If New Zealand's recession is over it lasted a full year and a quarter, which may turn out to be a slightly longer stretch than most countries where signs of emergence have also been apparent for a few months.

But ours started earlier because the Reserve Bank had tackled the long property price boom much more aggressively than other central banks, particularly the United States Federal Reserve which saw no risk in asset price inflation.

New Zealand's 15-month recession can be divided into a shallow domestic recession during the first half of 2008, followed by the international credit crisis in the second half of the year.

The scale of the effect of the global shock on the domestic economy can be seen in the statistics released yesterday. Output shrank by 1.8 per cent since June last year, the largest annual contraction since 1987.

Just as international conditions caused the slump international recovery is pulling us out of it. And the locomotive for us and the rest of the world seems to be China.

Primary production rose 1.5 per cent in the June quarter, largely in forestry and logging for increased exports to the People's Republic.

Thanks to the vigilance of the Reserve Bank during the boom, and the sound management of Australian-owned trading banks, this country weathered the financial crisis well.

But the high interest rates the bank maintained against property inflation produced high exchange rates that were crippling for exports and that problem remains.

While exports rose 4.7 per cent in the quarter and imports dropped by 3.8 per cent it would be brave to assert that this may be the first sign of a lasting realignment of economic resources. The import decline was mostly in capital equipment not consumer goods. Household spending was up 0.4 per cent and the dollar was trading above US72c, as high as a year ago.

If the legacy of recession is to be the "rebalancing" that Finance Minister Bill English expects, the recovery will have to be accompanied by some bold steps in monetary and fiscal policy. Property investment may need to be taxed more rigorously.

Interest rates might need to be set selectively to take pressure off the dollar and exporters. And state spending must be cut to tackle a projected decade of deficits.

Meanwhile the world appears to have drawn sufficient lessons from the Great Depression to avoid another. Now it faces debts and questions of financial regulation that will cloud everyone's economic outlook for a good while yet.