NZ recovery will be 'ahead of pack'

Alan Bollard said that despite signs of economic recovery, global growth would remain restrained for the next couple of years. Photo / Mark Mitchell

The end of the recession is in sight, the Reserve Bank and Westpac economists said yesterday, but both warn the recovery will be slow and may be unsustainable if driven by a fresh round of housing market exuberance.

"Early signs of global recovery have now emerged. We have avoided a repeat of the Great Depression," Reserve Bank Governor Alan Bollard said in a speech to the Hawkes Bay Chamber of Commerce.

However, world growth would probably be subdued for the next one or two years, and the current low international interest rates, expansion of liquidity and central bank balance sheets, and fiscal stimuli will be necessary for some time.

That said, New Zealand looked "likely to start recovering ahead of the pack".

Around the same time Bollard's speech notes were released, Westpac issued its July Economic Overview topped with chief economist Brendan O'Donovan's contention that while times were still tough, "we are now seeing the first signs of recovery".

"If it were not for the threat of swine flu, we would say that the recession has already ended."

Westpac research economist Dominick Stephens said the data had clearly turned in recent months.

"House sales are up 55 per cent on a year ago, house prices are probably rising, net migration is surging to an extent we haven't seen since 2002. We've also seen consumer confidence jump from abysmal levels to about average, business confidence has done about the same. Instead of economic activity declining at a rapid pace, we're looking at slow anaemic economic growth."

O'Donovan warned, however, that rising unemployment and weak exports would keep the recovery modest initially: "The business situation will feel miserable for a while yet".

In his speech, Bollard said the recovery was an opportunity to address economic imbalances.

"Getting the sort of sustainable recovery we want will be assisted by: First, greater savings by the household sector, to reduce the need for foreign funding of the economy; second, investment in the economy's productive base, particularly in the tradeable sector; and third, greater durability and depth in funding markets, including a lengthened maturity structure for bank funding."

However, he noted the "clear risk" that households resume their "borrow and spend" habits before they have paid down some of their existing debt.

"This could be triggered by renewed moderate house price inflation, and needs to be avoided."

But Westpac is predicting a "people-led recovery" with the surge in net migration which will benefit the residential construction industry first and lead to house price rises, which Stephens said was hardly ideal.

Although house prices had fallen, the decline was not sufficient in Westpac's view to reflect fair value. "They're now moving in a direction away from fair value and rebuilding these imbalances. I think at some point in the future there's still a correction awaiting us.

"When you were suffering from what was a housing bubble and then a housing bust, you don't want to see a housing-led recovery, we want an export-led recovery and we're not getting that."

While the Reserve Bank was right to be concerned about that, Stephens asked: "Why would you expect a rebalancing where people save more and borrow less when you've set the interest rate at 2.5 per cent?".

Given its more optimistic view of the economy's prospects, Westpac has adjusted its expectations as to when the RBNZ might begin lifting interest rates, and is looking for a movement in July next year, three months earlier than it previously thought.