Economy Hub: How bad is this downturn really?

Former PM John Key grabbed headlines at the weekend warning that New Zealand faces an economic downturn.

Then this week we saw sentiment on the ANZ Business Outlook slump to levels not seen since the global financial crisis.

We saw unemployment start heading in the wrong direction after five consecutive monthly falls.

We saw QV data showing the national average house price fell.

And we saw a major construction firm go into receivership leaving a number of half-finished projects.

Are we doing this? Are we having a downturn? And if so how serious will it actually be?

From a business point of view, there are some worrying signs, ASB chief economist Nick Tuffley told The Economy Hub this week.

Even putting aside the usual lower levels of confidence under Labour Governments, business appeared to be rattled by policies like the decision to ban offshore oil and gas exploration and proposed employment law changes, he said.

"Throw in things like Mycoplasma bovis for the dairy sector and the background noise globally and you can see why people are saying: what's going on here?"

But even the gloomiest economic forecasts only see GDP growth slowing to 2 per cent this year.

ASB was forecasting a rebound back above 3 per cent later this year, Tuffley said.

"Some of the drivers will change," he said. "We do see business confidence impacting on some investment and we do see that slowing this year. At the same it looks like housing and construction is going to be rebounding, our terms of trade are going to remain very, very high, interest rates are very low and we still have a fair degree of net migration [gain]."

Those things would continue to push the economy along after what had a been a modest patch of growth since the middle of last year.

Key, in his economic warning, highlighted the risk that global turmoil might push us into a deeper downturn than expected.

He argued, as you might expect at a National Party conference, that the current Government was not equipped to deal with that.

The risks were real, Tuffley said, but the New Zealand economy retained some strong buffers against a full-blown downturn.

"We are having a bit of fiscal loosening and that's one thing that is going to support growth, particularly the money that's going into households," Tuffley said. "Interest rates could come down or remain on hold longer than they otherwise would."

Our exchange rate would also likely come down and give exporters a boost, he said.

Different governments did mean slightly different influences on the economy, he said.

Had we stuck with the status quo last year it was likely business confidence would now be a bit more settled.

"The reality of change of Government is that we do have uncertainty. There are policies to work through, there are shifts in direction and it will take a bit for businesses to get their heads around that," he said. "They do need to start looking ahead at the longer term."