Recession ending but recovery will be slow

Economists are warning that the likely end of recession will not herald a strong recovery while unemployment continues to grow.

"We are coming out of recession but for a lot of people it is not going to feel like that, with the unemployment rate coming up," said ANZ National Bank chief economist Cameron Bagrie. "Just as 2008 didn't feel like recession I don't think the second half of 2009 is going to feel like recovery, even though that is what the data is telling us.

Westpac chief economist Brendan O'Donovan said last year's recession was a north-of-Taupo affair. "When the global downturn hit [in late 2009] it became an economy-wide recession and no region was spared," he said.

Auckland was leading the recovery. "Lower interest rates are doing the trick. Auckland is the most leveraged bit of the economy. They were hit most by high interest rates and get the most benefit from low rates."

O'Donovan said the recovery was being led by the housing market where turnover had lifted and prices stabilised, boosting consumer confidence. Net migration flows had turned around extremely strongly, he said, and construction would tend to follow that.

The need to rebuild inventories run down in the worst of the downturn would boost growth. "But the high exchange rate is keeping the export sector under pressure."

On a projected dairy payout of $4.55 a kilogram of milksolids, the drop in farmers' incomes and spending would deliver a $1.5 billion hit to provincial New Zealand, he said. But in the cities consumer spending, which had dropped a massive 9 per cent per capita from its peak, would start growing again now that the housing market had found a floor.

ASB chief economist Nick Tuffley said, "We will be back into very modest growth in consumer spending over the second half of this year."

But, in contrast to the debt-fuelled spending binge earlier in the decade, consumer spending would grow more slowly than incomes, which in turn would be pretty weak.

Fundamental demand for new housing would see a solid pick-up in residential construction if not late this year then certainly in the first half of next year, Tuffley said.

Beyond a period - about a year - when growth is led by housing construction we would expected to see more balanced growth, with exports taking more of the load."

In the mean time fretting about the absence of an export-led recovery was pointless and unrealistic in a world where GDP across the developed world was only just showing signs of having flattened out after a steep decline. Bagrie, however, detects signs the improvement in sentiment has passed from relief to an inappropriate euphoria, centred in the the housing market.

"It is moving beyond stabilisation. The danger is a lot of people are conditioned to the idea that when things settle down we are going back to the way they were in 2005 to 2007. That was abnormal."

Both in New Zealand and elsewhere it would take time for people to get their head around the structural changes that needed to happen, a weaning off the model of debt-fuelled consumption and on to the basics of improving productivity and a focus on earning a living as a trading nation.

"New Zealanders are not going to lose their fixation with property overnight. Resources are not going to switch from housing to real productive development overnight."

Bagrie compares the situation to the late 1980s when he says people struggled for years to get to grips with the switch from a high regulated to a deregulated economy. "We are getting nervous about the composition of growth. If you don't do the hard yards you end up with a W, which is the risk."

Reserve Bank governor Alan Bollard said that the mood among the world's central bankers, at their annual gathering in Jackson Hole, Wyoming, this month was that the worst was over, though they remained wary of setbacks.

GDP stabilised in the June quarter across the OECD, though it was still down 4.6 per cent on a year earlier. It was down 0.3 per cent in the United States compared with the March quarter, down 0.1 per cent in the euro area as France and Germany returned to growth, and up 0.9 per cent in Japan, after particularly ugly December and March quarters.

O'Donovan said that while the global environment was much improved, "Only time will tell if that is sustainable growth because it is all being driven by massive monetary and fiscal stimulus, and a very pronounced inventory cycle. It is yet to be seen whether the consumers of Europe and the United States in particular will get their credit cards out and start spending."