Bernard Hickey: 'Recovery' is a difficult road

Many consumers and small businesses are getting an uneasy feeling. Photo / Richard Robinson

This economic recovery feels like a Clayton's Recovery: the economic recovery you're having when you're not having an economic recovery.

Recoveries following the slowdowns of the 10 years between 1998 and 2008 had bounce and snap in them. This time around when you walk down the main street every second shop still has a 50 per cent off sign and every bank wants to put your money on term deposits, rather than offering you a cheap loan. Restaurants are not full. Hotels are quiet. Houses are not selling.

Many consumers and small businesses are getting an uneasy feeling. What happens next?

I think we face a decade or more of slow, grinding deleveraging of debt that presses down on economic growth rates, employment and asset prices, particularly house prices.

This deleveraging cannot be deferred or ignored. It has already started and is acting like a glacier grinding its way down the valley. It will carve out a different economic landscape. It will slowly turn our economic recovery from a V shaped one into a U shaped one.

Those with high debts will try to tiptoe out of its path or hope it melts before it gets to them. They can't get away and it won't melt.

This deleveraging grind will change the economy from a housing market with a few things tacked on into a more balanced economy driven by exporting and the productive sectors.

For many this may seem like a sobering forecast, so here's a few factoids to chew over.

New Zealand's household debt is worse in relation to disposable incomes than the US, Greece, Spain and the UK. Our foreign debt of around 130 per cent of GDP is about a third higher than is sustainable. New Zealand has to somehow over the next five to seven years suck around $50 billion worth of debt out of our economy.

We can reduce spending and save more, which we have started doing. Or we can stop borrowing and let our incomes rise to reduce our debt-to-income ratios. Or we could have a forced reduction of debt where the lender forgives debt and takes a loss. The last one isn't going to happen without some sort of financial catastrophe in Australasia, which is very unlikely.

So we face the slow grind of reducing debt and constraining spending while building incomes. It will be a long and hard road.

bernard.hickey@interest.co.nz