Recovery to be 'slow and fragile'

Darren Gibbs of Deutsche Bank

Economic recovery, when it comes, will be slow and fragile - not a swift return to normal in the sense of conditions prevailing before last year's crash.

That was the warning from several economic commentators last week.

AXA Global Investors chief economist Bevan Graham, in the fund manager's Quarterly Strategic Outlook, said recovery would come, but not until late this year at the earliest, and it would be subdued and have a few false starts.

"We remain concerned about the nature of the recovery that is expected to emerge in developed markets in 2010. It will largely be driven by fiscal stimulus rather than any underlying economic robustness and could therefore be termed somewhat artificial," Graham said.

"What we are seeing now is payback for years of over-investing in housing and over-consumption on the back of unsustainable growth in house prices."

Households need to reduce debt and they would not be able to do that and increase consumption at the same time.

The English-speaking countries which have been running large current account deficits need to focus on increasing exports.

But this is not only a deep but a synchronised global recession.

"We can't all export our way out of trouble. Some countries need to do the importing," Graham said.

The obvious candidates are the countries that have been running current account surpluses, notably China, Japan and Germany. But they are also being hit hard by the implosion in world trade.

Graham expects emerging market economies to outperform the developed world in growth, as they have for the past decade, in part because their average levels of household and government debt, relative to GDP, are much lower.

Deutsche Bank forecasts the Group of Seven big industrial economies to contract by 3.5 per cent this year, led by a 7.6 per cent contraction in Japan.

But among New Zealand's trading partners the contraction is expected to be a more modest 1.6 per cent.

Its chief economist, Darren Gibbs, said the contraction in global demand was mainly in consumer durables and capital goods, rather than food, which was the mainstay of New Zealand's's exports.

Jerry Jordan, a former president of the Cleveland Fed, who was visiting New Zealand last week, said that while people talked of conditions returning to normal, that should not be thought of as a return to the levels of consumption and activity the United States had enjoyed before the financial crisis.

US consumption had been turbocharged by very high levels of equity withdrawal from housing, approaching US$700 billion ($1.38 trillion) a year. It was that phenomenon - using the house as a cash machine - that had sustained demand for 17 million new cars a year, and so on.

In New Zealand, the Institute of Economic Research warned in its Quarterly Predictions that it would be a "long, slow grind back to economic normality".

It would take around four years for growth to return to more than 3 per cent a year, institute chief economist Johannah Branson said.

Employers' ability to hoard labour, and employees' sense of job security, would be key factors.

Bank of New Zealand chief economist Tony Alexander points to several factors which should mitigate the downturn in this country but stresses that they only limit the depth of the recession.

One is a boost in net migration as fewer New Zealanders leave and more expatriates return. Another is the structure of the economy, which is less reliant than many developed countries on manufacturing and financial services.

And the kiwi dollar's sharp decline has helped insulate the export sector.