New Zealand’s economy will run slow over the next few quarters as it negotiates the global economic downturn, Reserve Bank Governor Alan Bollard said in a briefing paper for the new government and published yesterday.
Mr Bollard said in the paper that the bank saw the economy rediscovering some growth late next year, but if figures released this week are any guide, the slowdown might have a way to go before the sunny uplands of a rebound can be sighted.
House sales fell in November by 40% and manufacturing output contracted at the fastest rate since 2002 and economists said these and other recent reports suggest the economy is in its deepest slump for at least two decades.
But the central bank expects inflationary pressures will dissipate and it will be able to further cut interest rates as those pressures ease.
"The global financial turmoil and the associated fallout for global growth is also having inevitable impacts on the New Zealand economy.
"It is making the process of economic adjustment that was already underway much more complex and difficult.
"The New Zealand economy has contracted over 2008 following a sustained period of growth for most of the decade. Drought conditions slowed growth by lowering production in a number of sectors.
"Domestic spending has been hit by the sharp increase in oil and food prices until recently, along with the tightening in global credit conditions.
"In addition, the sharp run-up in house prices and household debt, which had fuelled the expansion and stretched resources, could not be sustained indefinitely.
"Looking forward, we expect the economy to grow only slowly over the next few quarters before gaining more momentum toward the end of 2009.
""Household and business spending is likely to remain subdued for some time, notwithstanding the boost coming from easier fiscal policy and declining oil and food prices. Export growth will be restricted by the weakening in global activity.
"Together these will see inflation pressures dissipate further, although price trends in some non-tradeable areas remain of concern," Mr Bollard said.
Economists point out that the report was written before last Thursday’s 1.5% cut in the country’s Official Cash Rate to 5%.
Bollard said New Zealand’s financial system has faced “extreme disorder” from the turmoil in international markets, but the nation’s banks were well placed to weather a weaker domestic economy.
"Collectively, the banks, which represent the bulk of the deposit-taking sector, appear well placed to weather a weaker economy.
"New Zealand’s banks, and the Australian parents of the large Australian-owned banks, have sufficient capital to withstand an increase in loan losses associated with an economic downturn.
"Moreover, the banks are not directly exposed to many of the negative factors impacting on their global peers."
He said the central bank has put in place steps to bolster liquidity and is in talks with banks about new standards for future liquidity management, which will encourage them to diversify away from short-term wholesale funding.
New Zealand home sales tumbled in November and the manufacturing industry shrank by the most since at least 2002, suggesting the economy is mired in its deepest recession in 18 years.
Home sales dropped 45.4% in November, according to figures from the Real Estate Institute of New Zealand.
According to the Real Estate group, New Zealand home sales fell to 4,279 in November, close to the 19-year low of 4,220 recorded in August.
The performance of manufacturing index fell to 35.4 last month from 43.3 in October, the lowest reading since the series began six years ago. (That echoed similar readings for Australia, China, the US, UK and Europe.) The PMI has been less than 50 since May.
The declines follow figures showing export volumes, retail spending and construction work dropped in the third quarter, indicating New Zealand’s economic slump has worsened.
Including last week’s big chop, the country has seen the Reserve Bank cut the OCR by 3.25% since July to try to kick-start domestic demand. Our rate cut in Australia is 3% since September, but our economy is still growing (perhaps).
Bollard said he expects a 0.3% contraction, and some growth in fourth quarter (to March) as the economy embarks on a “shallow recovery”.
In a Note to clients this week, analysts at UBS in Australia said they expect the RBNZ to cut the OCR again in January and March next year, both times by 50%, taking the OCR to an all-time low of 4.0%.
