ECONOMICS : Recession or Simply Subdued?

Finance Minister Michael Cullen reportedly used curious expression when telling us the economy might soon shrink. The country might slip into “technical recession”, he said, although any recession was likely to be short and shallow. He did not expect to see the economy “going through the floor”.
“Technical”? As blog commentator grimly mused, it’ll be “technical” tax cuts next. The prospect of “recession” was the more important consideration, because Bank of New Zealand economists few days earlier had said the economy was being hit by “perfect storm” that would probably blow it into recession.
The Nats inevitably seized on Cullen’s remarks for questioning Prime Minister Helen Clark in Parliament. National leader John Key asked her if it was helpful to the Government “when the Minister of Finance goes around telling the New Zealand public that the economy is going into recession?” He did not say that, she responded. According to Key’s account of TV One clip, she was right – technically. It showed Cullen saying: “Um, ah, we might be going into technical recession…”
The economy certainly was slowing and raft of surveys – business, consumer, investment and employment – showed ominous slumps in confidence. Recessionary expectations were strengthened by the International Monetary Fund. According to its latest forecasts, the world economy hurt by the credit crunch – would slow to 3.7 percent in 2008 and 2009, 1.25 percent lower than growth in 2007.
The downturn would be led by the United States, expected to go into “mild recession” this year. The US economy was forecast to contract in the first half of the year and to grow by just 0.5 percent in the full year. Growth in the United Kingdom was forecast to slow sharply to 1.6 percent in both 2008 and 2009. But continued turmoil in financial markets might turn the credit squeeze into full-blown credit crunch. If that were to happen, the global downturn might be more severe than predicted. Hence there was one in four chance of “global recession” if world growth fell below three percent.
In this country, economists were mixed in their expectations.
On the grim side, the BNZ was warning of the likelihood of recession, along with 10 percent or more slump in house prices and rising rents. “In fact, it may already be there,” economist Stephen Toplis said in the bank’s weekly Economy Watch. Retailers were reporting tough times; four Canterbury building companies had closed in the previous week or so; oil and gold prices were soaring internationally as prospects of an American recession drove down the US dollar. The BNZ expected more property speculators and developers to go bust.
The BNZ said the increased costs of borrowing would feed through to higher rents, helping to pump up inflation. “perfect storm of adverse events” included the global credit crisis, the housing slump, rising commodity prices eroding personal disposable incomes, weakening international trading, high interest rates and drought.
On the other hand, BERL senior economist Ganesh Nana was sure New Zealand was not about to slump into recession and dismissed such talk as “uninformative grandstanding”. He derided what he said had been an inglorious rush to be the first to confirm the economy was in recession (defined as two successive quarters in which the economy shrinks).
BERL agreed New Zealand’s economic performance over the next two to three years would be “subdued, rather than stellar”. It would be affected by the deterioration of the global financial and credit system but the medium-term outlook was helped by dairy and oil exports, and employment growth was not heading into downward spiral as some economists had forecast.
The picture was bleak for the external sector, however, except for dairy and oil. Only tourism maintained “a semblance of moderate medium-term growth prospects”, although even this was set to remain well below potential, thanks to the over-valued New Zealand dollar.
Let’s go down the middle. The NZ Consensus Forecasts, an average of New Zealand economic forecasts, showed forecasters were expecting annual average GDP growth in the year to March to be three percent (up from 2.9 percent in the previous survey in December). Average GDP growth is expected to be 1.7 percent and 2.4 percent in the years to March 2009 and 2010 respectively (down from 2.1 percent and 2.7 percent). But there’s wide range between the forecasts: in 2008/09, for example, the lowest forecast is 0.7 percent and the higher 2.8 percent.
A critical factor as we weigh up these expectations is that this is election year, the Government is keen to be re-elected, and it has Budget to announce in May. It won’t want voters feeling grumpy when they go to the polls.

Bob Edlin is leading economic commentator and Management’s regular economics columnist.

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