Brian Gaynor: Forecast - Persistent rain but no flood

This recession is more like several weeks of rain rather than a big storm. Photo / Paul Estcourt

The March quarter gross domestic product figures confirm that the economy has contracted for five consecutive quarters. This is the longest negative streak since quarterly GDP statistics were first compiled in 1987.

How deep is the recession, how do we compare with other countries and will we participate in the next global recovery?

The first point to note is that this country's recession has great staying power but is relatively shallow. It is more like several weeks of persistent rain rather than a short period of intense rainfall and heavy floods.

A recession is defined as two consecutive quarters when GDP declines, on a seasonally adjusted basis, compared with the previous quarter. The three recessions since 1987 are as follows:

GDP contracted by 3.5 per cent in the 1991 recession. This lasted two quarters, from January to June 1991.

GDP fell by 1.3 per cent in the 1997-98 downturn, which lasted two quarters from October 1997 to March 1998.

The current slump is by far the longest yet GDP has fallen just 3 per cent, which is slightly less than in the 1991 recession.

Measuring GDP was a fairly hit and miss activity before the 1980s but economists believe we have had the following GDP contractions since the mid-1800s:

GDP fell by 6.4 per cent in 1880.

Economic activity slumped by 5 per cent in 1909.

In 1922 and 1923 GDP declined by 6.4 per cent.

There are a wide range of estimates for the early 1930s but the Institute of Economic Research estimates that GDP shrank by 14.6 per cent and Statistics New Zealand believes it declined by 12.3 per cent during this severe depression.

The economy contracted by 5 per cent in 1949 and by 5.5 per cent in 1952.

Thus the current situation is nowhere near as bad as the 1930s and is more benign than the 1880, 1909, 1922-23, 1949, 1952 and 1991 contractions.

GDP declined by 1 per cent in the March quarter, on a production basis, and by 0.7 per cent on an expenditure basis.

The expenditure basis is used in this analysis to compare us with other countries (see table).

All the countries included in the table started the 2008 year on a positive note with the exception of New Zealand. The economic slump deepened as the year progressed and most countries had a dreadful last quarter and a terrible start to the year.

In the December quarter only four of the 30 OECD countries, Greece, Norway, Poland and the Slovak Republic, had GDP growth. The worst performing countries were Ireland, which suffered a horrific 7.1 per cent slump in GDP, and Korea where it fell 5.1 per cent.

All but three of the OECD countries have released figures for the March quarter with only Australia, Korea and Poland achieving economic growth. The worst performing country was the Slovak Republic where GDP contracted by 11.4 per cent.

At this stage 23 of the 30 OECD countries are officially in recession compared with a previous high of just 12 countries in the mid-1970s (the OECD did not exist in the 1930s).

Australasia, particularly Australia, has held up remarkably well because we have a relatively small manufacturing sector and this is bearing the brunt of the global downturn.

Japan, where GDP has slumped 8.4 per cent since the March 2008 quarter, is an excellent example of this.

The country's exports have fallen by more than 40 per cent for each of the first five months of the current year compared with the same months in 2008. This is due to a huge reduction in demand for its exports, mainly motor vehicles, semiconductors, iron and steel products, power generating machinery, electrical apparatus, computers and ships.

This has impacted on Japan's industrial production which is down more than 30 per cent compared with the first few months of 2008.

Most other manufacturing countries, including the US and Germany, have experienced sharp contractions in industrial production but not to the same extent as Japan.

Fisher & Paykel Appliances, which is New Zealand's only big listed manufacturer, has also been adversely affected by the sharp reduction in demand for big ticket consumer items.

The capital goods and big ticket consumer manufacturing sectors have been the most severely affected because the purchase of these products is funded, at least partly, by credit and this is in short supply.

The OECD, which released its latest Economic Outlook this week, is forecasting that all of its 30 member countries will experience a decline in GDP this year.

The Paris-based organisation is forecasting New Zealand's GDP to fall by 3 per cent compared with a 4.1 decline for all 30 countries.

The two best performing countries are expected to be Australia and Poland, with GDP falling by just 0.4 per cent, while the Irish economy is expected to be the worst, with economic activity predicted to fall by a staggering 9.8 per cent.

New Zealand is also expected to perform relatively well in terms of employment, with the OECD forecasting our 2009 unemployment rate at 6.3 per cent compared with an OECD total of 8.5 per cent.

New Zealand has avoided the worst of the recession but there are a number of reasons why we could lag behind the rest of the world in the next economic upturn. These include:

Countries with big manufacturing sectors, which have suffered the most in the downturn, should pick up faster as buyers catch up on purchases deferred during the recession.

New Zealand has been heavily reliant on imported credit over the past two decades and this will be harder to obtain in the years ahead.

Equity funding will play an important role in the next economic upturn and this is in short supply in New Zealand because of our low savings rate.

The Government will have limited opportunities to boost economic growth because of its high debt levels.

The country's large current account deficit and huge offshore borrowings will be a restraint in the next global upturn.

New Zealand has limited export exposure to China and the other Asian countries that are expected to lead the recovery.

Last, but not least, is the strong position of our neighbours.

The strength of the Australian economy should boost exports but our best and brightest will cross the Tasman in increasingly larger numbers if our economy continues to underperform.

New Zealand has done remarkably well to avoid the worst of the global recession, mainly because of our small manufacturing base, strong banking sector and effective Government and Reserve Bank policies.

However effective economic management should also have a medium and long-term focus and we are lacking in this regard.

As a result, we should be less concerned about the depth of the recession and more worried about our ability to take part in the global upturn.

Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.