KEY POINTS:
The economy is well placed to weather the potential fallout from the problems in the US housing market that have sent world equity markets and the New Zealand dollar tumbling in recent days, economists say.
Over the past few years large numbers of low quality or "sub-prime" US mortgages have been packaged into securities and sold to investors. But rising defaults in the sub-prime sector have weighed on the value of those securities and the US credit market.
As a result, nervous investors have rushed to reduce their exposure to all kinds of riskier assets including the New Zealand dollar and equities.
The problems also mean home loans are more difficult to obtain in the US, which still has a considerable stock of unsold new houses. With US house prices static or potentially falling, there are fears consumers will curb spending and growth in the world's largest economy will slow.
While still not high, chances of a US recession which could spill into other countries including New Zealand have now risen, commentators say.
However ASB Bank chief economist Nick Tuffley said the Reserve Bank, having raised interest rates to the highest level in the developed world to curb housing inflation in recent years, was in a position to swiftly address any potential slowdown.
"They can drop interest rates a marked distance and that would also propel the currency down quite sharply too. So we are very well placed, if things do look a little bit worse in the global environment, to react to such developments very quickly."
Tuffley acknowledged the US problems meant there had been a small increase in the chances of a New Zealand recession but the likelihood remained low.
"The prime causes for any recession in New Zealand if one were to happen are likely to be home grown, either from our very resilient housing market falling flat on its face or through the export sector suddenly finding that the exchange pressure is too unbearable."
The probability of both those scenarios was very low, he said.
UBS New Zealand economist Robin Clements agreed a New Zealand housing market tumble was one of the more significant potential risks to the domestic economy and a global economic event could trigger that.
The sharemarket yesterday closed lower for the fifth consecutive session, despite recoveries on other markets. It has now lost more than $2 billion of its overall value as a result of the US sub-prime jitters but some sectors of the economy have seen some small benefit.
Room to cut
* The Reserve Bank has plenty of scope to cut interest rates if US sub-prime worries start to weigh on the local economy.
* Despite substantial recent falls on global equity markets, the world economy remains in good shape.
* The fallout from sub-prime has given exporters some modest relief by driving the New Zealand dollar lower.
