KEY POINTS:
The Treasury has "deep concern" about the rapid slowing in world trade and says the "downside" scenario on which the New Zealand economy is tracking could deteriorate even more.
Prime Minister John Key's office yesterday released notes from the Treasury's Thursday update to ministers on the international economic outlook and its forecast impact.
In summing up the "bad news" internationally since its December update, the Treasury used unusually strong language, warning of "deep slowdowns" in major economies such as the United States, Britain, Russia, China, India and Russia.
"Australia's prospects are highly linked to Asia's - and ours to Australia's. The rate at which world trade has fallen away in recent months is of deep concern."
It said there were also unprecedented commodity price drops.
On Thursday Mr Key said the Treasury had told his economic ministers its downside scenario in December was now likely to be the reality.
Forecast growth for 2009 was at a "standstill" and unemployment was expected to rise to 7.5 per cent by 2011 - up from about 4 per cent now.
The briefing paper reveals the Treasury warned things could get even worse. The main risks for New Zealand this year included households stopping spending, banks freezing up on lending, falling dairy prices and diving commodity prices in general.
Mr Key said he was satisfied the bank deposits guarantee scheme was working - but issued an apparent warning to the banks' international owners that the quid pro quo of the scheme was for the credit lines to New Zealand businesses to remain open.
The Treasury paper showed the average growth of New Zealand's trading partners this year was now forecast at just over 1 per cent - and possibly as low as 0.4 per cent. In 2007 average growth was about 4.2 per cent.
The "slightly better" news was that equity and financial markets had stabilised since the credit crunch hit in the United States, and there was a "growing view that the major financial surprises are now out".
Early next month Mr Key is due to announce measures to help small and medium businesses cope and try to curb job losses. He said the importance of changes to the regulatory burden should not be underestimated.
Finance Minister Bill English has also previously mentioned contingency plans for businesses struggling with the recession.
