KEY POINTS:
Attention has turned to the international and domestic economy now that the world credit crisis is showing signs of abating.
Economists and investors are trying to predict how long the recession is going to last, whether it will be deep or shallow and what the impact will be on New Zealand.
Recent economic data, particularly in relation to housing, retail sales, production, unemployment and commodities, clearly indicate that the developed world is in recession, with most Western economies expected to report a decline in real gross domestic product (GDP) for the September or December quarters.
The housing bubble is the root cause of the problem and prices and new construction are dropping sharply in most countries.
US house prices, as measured by the S&P/Case-Shiller House Price Index, have fallen 19.5 per cent from their July 2006 peak and September housing starts were 62.1 per cent lower than the same month three years earlier.
The slump in housing is having a major impact on consumer confidence with retail sales falling in North America and in many European countries. The slowdown in housing construction and retail spending has impacted on the manufacturing sector with the latest US figures showing industrial production declined by 2.8 per cent in September compared with August and was 4.5 per cent lower than September 2007.
The unemployment rate in the 30-country OECD has risen from 5.5 per cent at the beginning of the year to 5.8 per cent in July and 6 per cent in August. The good news is that New Zealand's unemployment rate, at 3.9 per cent, is well below the OECD average. But the fall in commodity prices, especially oil, has been particularly dramatic. This is positive in terms of inflation but indicates that worldwide demand is declining and export-led economic recoveries will be more difficult to achieve.
Most commodity prices have dropped sharply with copper off 56 per cent from its July highs, coffee prices are down 35 per cent from earlier this year, wheat has slumped 58 per cent since March, US sawn timber prices have declined 35 per cent since the end of 2007 and oil prices have plunged 56 per cent over the past few months.
Dairy prices have not been immune with international milk powder prices down 44 per cent from their peak 12 months ago.
One of the more closely followed indicators is the Baltic Dry Index, a daily index of shipping rates for bulk carriers carrying a wide range of commodities including wheat, iron ore and coal.
The index peaked at 11,793 on May 20 and since then has plunged 90.6 per cent to close at just 1149 on Thursday. Although the index has been volatile in the past this sharp drop is unprecedented and indicates that the demand for commodities will continue to be weak. Industry reports this week indicated that a number of fully loaded oil tankers were roaming the seas struggling to find buyers for their cargo.
The International Monetary Fund issued a downbeat forecast for the world economy during the week. It said that the "outlook points to a major downturn for the global economy with growth falling to the slowest pace since the 2001-02 recession".
It believes that the current financial rescue plan is working but it will take some time for "the proper functioning of credit markets".
The IMF believes that growth in the advanced economies will "be close to zero at least until the middle of 2009" and its baseline projection for the US is that a recovery will begin in the second half of next year.
Many economists still believe China could rescue the Western world and its September quarter GDP, which was announced this week, grew by 9 per cent. This would be a fantastic number in most other countries but China would essentially be in recession if growth dips below 8 per cent because this is the figure needed to fully absorb the country's burgeoning work force.
Unfortunately New Zealand, which was a major participant in the global housing bubble, is caught in the worldwide economic downdraught. The accompanying statistics clearly indicate that the domestic economy is struggling.
House prices fell 6.1 per cent in the year ended September and are off 6.2 per cent from their all-time high. This is not as bad as other countries but the dramatic fall in sales indicates that further price weaknesses are likely.
Building consents, for new houses and apartments, declined by 47 per cent in August compared with August 2007 but the banks are still lending with total household debt rising from $161.6 billion to $173.2 billion in the year to August.
Retailers are struggling with August sales declining by 0.9 per cent in dollar terms compared with August 2007 while the rate of inflation was 5.1 per cent over the same period. Furniture, hardware, appliance and motor vehicle retailing has been particularly depressed as households have cut back their spending to essential, non-discretionary, items.
The retail sector is also impacted by the sharp drop in inbound tourist numbers and this trend is expected to continue.
The new and used car markets are having a particularly difficult time with new car sales in August down 16.4 per cent compared with the same month in the previous year.
The current account deficit continues to be a major concern. This reflects the country's low savings rate, heavy reliance on offshore borrowings and the overseas ownership of many of our major companies.
Contact Energy's annual meeting this week was a timely reminder of the frustrations associated with majority ownership of major companies by out-of-touch foreign directors.
Finally the country's export receipts have been boosted by the commodity price boom but this is ebbing rapidly. The ANZ Commodity Index, in NZ dollar terms, has begun to fall and international dairy prices have been unexpectedly weak in recent months.
Economic statistics released over the next few months will not be positive because consumers usually restrict their spending during a general election campaign and this has been compounded by extensive media coverage of the global financial crisis.
The next few months will be heavily influenced by the Government's post-election policy initiatives and the willingness of Reserve Bank Governor Alan Bollard to take a more aggressive stance on interest rate reductions.
Christmas shopping is expected to be subdued and this will flow through to economic activity next year.
The best we can hope for is that the recession bottoms out in the first half of 2009 and a recovery begins in the latter part of the year. The recovery will have to be export-based because New Zealand cannot continue to rely on its "borrow and spend" approach to economic growth.
An export-led recovery is highly dependent on an upturn in the world economy and international trade. Thus a robust international upturn is an essential ingredient for a New Zealand recovery in the latter part of 2009.
Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management. bgaynor@milfordasset.com
