KEY POINTS:
A happy New Year is not on the cards, at least not as far as the economy is concerned.
For most of the past year the expectation was that an export-led recovery next year would haul the economy out of recession.
But then the rest of the world dropped its end of that rope. Economists now tend to see recovery as a 2010 story.
The credit crunch, rumbling since the second half of 2007, went critical in September and October.
Credit markets seized up and there was an avalanche of selling on world sharemarkets. Coming on top of housing busts across most English-speaking countries, the wealth destruction has run into tens of trillions of dollars worldwide.
The result has been the onset of a simultaneous recession across the developed world and the bleakest global economic environment since the early 1980s.
These gale force headwinds hit a New Zealand economy which had no forward momentum, having been in its own home-grown recession since the start of this year.
The middle years of this decade were marked by a debt-propelled spending binge as confidence was underpinned by a tight labour market and steep rates of house price inflation - or as homeowners prefer to think of it, capital gains.
But house prices cannot indefinitely rise two or three or four times faster than the incomes out of which mortgages and rents are paid.
Nor can the household sector as a whole continue indefinitely to spend $1.14 for every $1 of income.
Household debt levels, relative to incomes, doubled during the 1990s and in the current decade have almost doubled again. This was not a sustainable trend and the past year has seen the inevitable correction.
The housing market dropped with a thud, retail spending contracted in real terms and the growth in household debt just about dried up.
As the recession drags on - three successive quarters and counting - the business sector has also had to pull in its horns.
"Businesses have been on a hiring freeze for the past year but we are now at the stage of the recession where jobs are being shed," said Goldman Sachs JBWere economist Shamubeel Eaqub.
He expects the economy to shed 75,000 jobs through 2009.
The job losses would not be confined to the inward-facing parts of the economy, where most of the employment gains of recent years had been, he said. "Increasingly external sector jobs, for example in tourism, are at risk."
Rising unemployment would compound weakness in the housing market and in consumer spending.
The Reserve Bank forecasts house prices, from their peak in late 2007, will fall 16 per cent by the end of 2010 in nominal terms or 24 per cent in real terms. So far we are about halfway through that decline.
ANZ National Bank chief economist Cameron Bagrie said the weakness in the housing market so far had occurred when the labour market was still relatively tight and wage growth strong.
"A rapid deterioration in job security and the likelihood of smaller wage increases over the coming year represents another leg of economic weakness to come," Bagrie said.
"We continue to look for real house prices to go through a 20 to 30 per cent peak-to-trough contraction as affordability measures adjust to more appropriate levels."
Westpac economist Dominick Stephens doubts house prices will get back to 2007 levels before 2012.
"It was extraordinarily easy to borrow money from 2003 to mid-2008. Banks are now starting to demand bigger deposits for houses and are becoming stricter on credit criteria. Fewer first home buyers will be able to raise a sufficient deposit and fewer property investors will be able to buy using leverage, even if properties eventually look cheap."
Housing supply and demand are roughly in balance, Stephens said. That is in stark contrast to the Untied States where an unchecked housing boom led to a gross oversupply of housing and prices have fallen steeply.
"As we head into 2009 a housing shortage could develop. Building consents indicate very few houses will be built over the next six months," he said.
"But New Zealand might experience an increase in net immigration as the economic slowdown in Australia reduces the flow of Kiwis across the Tasman and the parlous economic situation in the UK sends Kiwis there scurrying home, which is what happened during the last global slowdown."
So far, however, there is no sign of that. In the three months ended November there was a net outflow of 630 permanent and long-term migrants. For the year ended November the net migration gain was just 3600, the weakest for seven years and only 30 per cent of the average gain since 1990.
The impact on migration flows is only one of the ways the global recession will be felt here.
More important are the trade channel - reduced demand and lower prices for exports - and the effect on the cost and availability of credit, since the banks have come to rely on credit markets offshore for up to 40 per cent of their funding.
Forecasters caution that there is a lot of uncertainty about the global economic outlook, both about how bad it will get and about how much it will impact locally.
But in the past, Shamubeel Eaqub said, every 1 per cent off global growth has meant 0.7 per cent off New Zealand's.
And over the past year the average forecast for growth among New Zealand's main trading partners in 2009 has plunged from 3.5 per cent to 0.5 per cent.
Already world prices for dairy exports have fallen 43 per cent over the the past year, albeit from record highs.
ANZ's basket of export commodities is down 18 per cent, but all of that fall - so far - has been offset by a weaker exchange rate.
The lower dollar is a two-edged sword, however. It has buffered the effects of an export commodity slump. But it has also limited the extent to which consumers and businesses benefit from a dramatic drop - more than two-thirds since July - in world oil prices, and it puts upwards pressure on the cost of imports generally.
Despite that effect, the Reserve Bank forecasts inflation to fall from just over 5 per cent now to 2 per cent by the second half of 2009. Some private sector forecasters have it falling below 1 per cent.
With wealth evaporating, unemployment mounting and the grimmest global outlook for a generation, policymakers have not been standing idly by, either here or overseas.
New Zealand went into this downturn with just about the highest policy interest rates around, and correspondingly more room to cut them.
So far the Reserve Bank has cut the official cash rate 325 basis points, and with an OCR of 5 per cent Governor Alan Bollard still has plenty of rate-cut bullets left in his bandolier.
The financial markets are expecting another cut of at least 50 points, or more likely 75, on January 29, and some forecasters see the OCR hitting 3.5 per cent before he is done.
But the banks' reliance on imported funding, in the context of a global credit crunch, will dilute the impact of domestic OCR cuts on retail borrowing rates and the availability of credit.
So the Government's fiscal policy is expected to have to do more of the stimulatory work than it would during a milder recession.
The Treasury estimates that the cumulative boost from tax cuts and Government spending increases in the two years to June 2010 will amount to more than 5 per cent of GDP - hefty by historical and international standards. But by the time of the next Budget in May the pressure for more stimulus is likely to be strong.
"Eventually the mass of monetary and fiscal easing assaulting the economy will pay dividends," Bank of New Zealand economist Stephen Toplis said. "But 'eventually' is the key word in that sentence ... We are hanging out for 2010."
