NZ economy slipping, experts warn

The economy is slipping toward recession, shored up only by a strong housing market and high employment, economists say.

In some of the toughest talking for months, Westpac chief economist Brendan O'Donovan described New Zealand's present business cycle as "well past its best-by date".

"Thank goodness the housing market hasn't yet hit the wall, or else the dreaded R word, recession, would be the topic of the day," he said.

"Westpac has long been of the view that a record level of the exchange rate, rapidly dropping net migration, higher interest rates and an eventual tipping over of the housing market would knock the economy for six."

However, there might be light at the end of the tunnel for battered exporters. After creeping through the 74-cent mark against the United States dollar in March, the New Zealand dollar slumped to an eight-month closing low of 68.01c yesterday, pushed down by the strengthening greenback and a narrowing interest rate gap.

The growing caution among economists comes after lower-than-expected March-quarter gross domestic product figures, which delivered only 0.6 percent growth compared with the same period last year.

Annual GDP growth slowed to 2.5 percent at the start of this year, down from 5.8 percent in June 2004.

"The relatively weak GDP result joins a collection of other data suggesting an economy that has the wobbles," Mr O'Donovan said.

Net migration is heading down and the mortgage war rebound is proving only a reprieve for the housing market.

Statistics New Zealand figures last week showed New Zealand's trade deficit for the year to May blew out to $5 billion. Building consents for May were down 22 percent on last year.

On the positive side, Mr O'Donovan said unemployment remained low and consumers were optimistic, which was helping to maintain healthy growth in consumer spending.

"The Reserve Bank is in denial and can't see the weakness in the economic data... (Its) tight monetary policy is also past its use-by date, giving the economy a bad case of salmonella," he said.

The Reserve Bank will review the official cash rate this month, but few expect a drop, with inflation projected to nudge 3 percent by mid-year.

Bank of New Zealand economists said the economic outlook was "shaky".

However, though its business confidence was down to June 2000 levels, the BNZ said consumer confidence was holding up.

"Who can blame them for feeling good about life when house prices were up 11 percent in the past year, unemployment is near record lows and wages are climbing?" BNZ markets economist Dean Ford said.

Deutsche Bank chief economist Ulf Schoefisch said he expected to see increased spending from the Labour Party if re-elected or tax cuts if National was voted in.

"I think that will provide a bit of a fiscal cushion... that will stop the economy sliding too far."

- NZPA