Shadows still lurk behind brighter prospects

The economic year ended far more brightly than it started, but the silver lining blinded many from seeing the very big dark cloud that lay behind it.

When 2009 began, New Zealand had been in recession for a year and like the rest of the world was reeling from the global financial meltdown.

The outgoing Labour Government had already put in place financial guarantees to ensure confidence in the banks operating in New Zealand and to stop a flood of money leaving the institutions for safer havens.

It is only now emerging how perilous the situation was early in 2009.

Reserve Bank Governor Alan Bollard at his last press conference of the year thanked the media for not creating more panic than they did.

Senior ministers have also since hinted that they feared then that a run on the banks was just a few headlines away and there was nothing they could have done about it.

Last summer, the world headlines weren't just gloomy - they were positively apocalyptic. Governments poured in trillions to prop up failing financial institutions, gigantic companies fell over and entire economies went into nosedives.

By the time Finance Minister Bill English came to write his first Budget the Government's books were already bleeding red ink.

The Treasury warned in the May Budget that the synchronised global slowdown was unprecedented since World War II.

Its fiscal outlook was full of words like "uncertain", "untested", "complicated" and "crisis" as the boffins looked on at the US and others trying to stimulate their economies.

Mr English's prescription was modest by international standards, but also to the surprise of many he did not use the crisis as an excuse to slash into spending. Planned tax cuts were chopped and contributions to the Cullen Fund were put on hold as Mr English warned of "a decade of deficits" and the need to put the brakes on spending to get debt under control.

In the 2008 Budget, the Labour Finance Minister Michael Cullen warned that the Government faced ongoing cash deficits of just over $3 billion for the next few years.

By the time Mr English replaced him this had grown to $8.5 billion in 2009, and will be $12.5 billion by 2011.

As winter rolled around the dole queue grew and companies fell over as export markets dried up and consumers at home closed their wallets.

House values declined and the number of sales fell as New Zealanders discovered their favoured investment vehicle was not constantly reliable, but still a safer bet than the many shonky financial institutions that continued to ruin thousands of people's lives.

Spring in New Zealand coincided with the so-called "green shoots" of recovery being spotted around the world. Many of these were illusory or killed off quickly by economic frost, but once again the land came to breathe life into New Zealand's economy.

China soaked up logs and the demand for dairy products lifted farm incomes.

Employers held on to employees though they worked fewer hours and stopped getting pay rises.

By the time December rolled around silver linings were popping out all over the place with few mentioning the dark clouds that lay behind them.

Silver lining - Current account (the measure of money coming into the country and going out) went into surplus for the first time in decades.

Dark cloud - Foreign-owned firms were making losses and had no profits to send home and New Zealanders are too broke to buy imports.

Silver lining - The Government's books were better.

Dark cloud - Deficits are still predicted for years to come and revenue is down this year, even more than predicted in the grim May Budget.

Silver lining - Unemployment will not grow as high as feared.

Dark cloud - The number of people out of work is still predicted to climb and stay longer than forecast earlier.

Silver lining - The economy grew 0.2 per cent in the September quarter.

Dark cloud - Economic activity remains almost 3 per cent down on the peak two years ago with the manufacturing and construction sectors still falling and business investment down sharply.

As the Treasury likes to say, 2010 will remain uncertain.

While 2009 may have been one of the darkest years in recent economic history, 2010 may prove to be one of the most interesting especially if the Government overhauls the tax system.

- NZPA