John Roughan: No sign of recession in the Deep South

Near the end of a week in the Deep South recently, it struck me I had heard no mention of recession and seen no sign of it. Southland, like the rest of rural New Zealand, is living on dairy prices that are down this season, from exceptional to good.

The problems you hear are still those of prosperity: cow pasture is not as attractive as the landscape that sheep used to graze to a lawn. Nitrogen run-off is polluting streams and rivers of trout.

I see the place as only an uprooted child does. Aged 10, I was old enough to feel the tug of familiar soil but not to have a say in the move. Each time I return the hills and sky reclaim me. So maybe it's a romantic view but I swear there is no recession there.

The farmers agree and so do their banks, which caused the Reserve Bank to worry aloud this week about the level of debt in the rural sector, particularly in dairy farms.

Revealing that the bank is talking to commercial banks about the adequacy of capital they are holding to support farm lending, Deputy Governor Grant Spencer said, "We need to make sure banks have buffers to handle a more substantial shock ... in today's world you're never sure what's around the corner."

What is the matter with our economic Brahmins? With world finance frozen in fear of its own shadowy products, our banks are maintaining ample credit for farming. Couldn't that be good?

Last month, bank Governor Alan Bollard was going to great lengths to dispel a little optimism that was causing households to fix their mortgages at current low interest rates. Couldn't that be a good thing?

The odd thing about this week's warning on rural debt was that it came in a Financial Stability Report that chastised banks for excessive caution in lending to business generally. That is where the credit crisis has been biting on the real economy.

Unless you are hoping to sell a house or have to convince a bank to maintain your business overdraft, you don't see much of the recession in Auckland either. This is not to deny we are having one; closed shops attest to a long slump in consumer spending. But we are not seeing a replay of the Great Depression, not yet.

The employment figures released last week were astonishingly good. At the end of March, six months after the Lehman Brothers collapse triggered the global financial crisis, unemployment in New Zealand registered just 5 per cent.

This is about half the level we used to suffer at slumps in the business cycle when the economy was protected and feather-bedded.

The economy has lost just 24,000 jobs - 1.1 per cent of its December total - in the first three months of a year we were led to fear. And 80 per cent of those made redundant were part-time workers.

In December, at the end of a full year's domestic recession, the number of jobs had actually increased. You could be forgiven if you hadn't noticed. Reports and commentaries discounted the result and focused primarily on their dire predictions for the new year.

Last week, the story was much the same. "Not bad considering ... but still pretty bad. That was the tenor of market economists' reaction to the March quarter jobs data," reported the Herald's economics editor Brian Fallow.

The suspicion is that employment is defying the long contraction in activity because firms are "hoarding staff" - keeping them on with less work to do in case they need them again soon.

Couldn't that good? If employers are prepared to carry more staff than they need there are at least three reasons to cheer: it suggests their business is more resilient than surveys of their confidence have given us to expect, that labour shortages in the boom have had a lasting impact on job security, and firms are taking the worst economic predictions with a healthy grain of salt.

The reason economists are not cheering, I think, is that they see the recession as a necessary cleansing that needs to last a bit longer.

The long millennium boom went bad in various ways. In this country it drove house prices to six and seven times the annual incomes of those trying to buy their first home. In the United States and Europe the boom put enormous wealth into dimly understood financial products that lost any connection with an essence of capitalism, calculated risk.

The recession needs to last long enough for the finance industry to be chastened, and for the rest of us to look beyond property for personal investment. Hopefully, house prices have a long way to fall yet.

But if banks are channelling a little less wealth to cities and more of it to farms, the recession is making the country stronger. Couldn't that be good?