KEY POINTS:
The New Zealand recession will deepen and trough around mid-2009, according to Goldman Sachs JB Were's economic outlook.
The financial service firm was predicting lower economic growth and the official cash rate (OCR) to be at 3.5 per cent by the middle of next year.
It was also hinting at the possibility the OCR will be cut by 1.5 per cent next month.
Shamubeel Eaqub, director of Australia & New Zealand Investment Research, said the domestic recession was well established and set to continue with tight monetary and financial conditions exacerbating a deepening and spreading housing bust.
Rapid deterioration in global growth prospects in recent months meant the outlook for 2009 was marked down.
The company now expected economic growth to slow from 3.2 per cent in 2007 to an estimated 0.3 per cent in 2008 and - 1.0 per cent in 2009, (previously 1.3 per cent).
"Consensus forecasts for 2008 and 2009 are 0.5 per cent and 0.6 per cent respectively and do not fully incorporate the weak global growth prospects in our view," Mr Eaqub said.
"We now expect a more aggressive monetary easing cycle both in pace and trough. We expect the OCR to be reduced to 3.5 per cent by mid 2009, mimicking a similar magnitude of cuts delivered post the Asian financial crisis."
There was equal risk of aggressive front loading and the Reserve Bank's (RBNZ) thus far observed reactive easing path.
"Our base case for the December 4 meeting is a 100bp OCR cut, a 150bp cut is close to even chance in our view."
Large external imbalances, falling commodity prices, domestic recession and deep rate cuts meant the New Zealand dollar was likely to depreciate further.
The NZD/USD was now expected to be 52 cents, 54c and 55c in three, six and 12 months (previous 64c, 64c and 60c).
Aggressive easing and deepening recession through to mid 2009 should set the scene for a sequential recovery in the second half of 2009.
The timing and pace of recovery would hinge crucially on RBNZ policy response, pace of labour market adjustment and the global economic cycle.
Further aggressive interest rate cuts, potential exchange rate depreciation and a trough in the recession around mid 2009 would be key to investment themes, he said.
"The rates and New Zealand dollar themes are not yet fully priced in markets and are a source of opportunity in our view.
"On the NZD, we expect a medium term trend of depreciation punctuated by risk appetite related volatility."
On NZ equities, Goldman Sach's strategist recommended tilting portfolios to benefit from exchange rate and interest rate exposure.
This was best achieved through external exposures, especially companies with secular growth, and selective cyclical exposures.
Funding ideas include defensives and weak balance sheet stocks.
- NZPA
