Brian Fallow: Best hope for next year may be recovery in 2010

Page 1 of 3 View as a single page 4:00AM Tuesday Dec 30, 2008
By Brian Fallow

Wall St meltdown

A happy New Year is not on the cards, at least not as far as the economy is concerned.

For most of the past year the expectation was that an export-led recovery next year would haul the economy out of recession.

But then the rest of the world dropped its end of that rope. Economists now tend to see recovery as a 2010 story.

The credit crunch, rumbling since the second half of 2007, went critical in September and October.

Credit markets seized up and there was an avalanche of selling on world sharemarkets. Coming on top of housing busts across most English-speaking countries, the wealth destruction has run into tens of trillions of dollars worldwide.

The result has been the onset of a simultaneous recession across the developed world and the bleakest global economic environment since the early 1980s.

These gale force headwinds hit a New Zealand economy which had no forward momentum, having been in its own home-grown recession since the start of this year.

The middle years of this decade were marked by a debt-propelled spending binge as confidence was underpinned by a tight labour market and steep rates of house price inflation - or as homeowners prefer to think of it, capital gains.

But house prices cannot indefinitely rise two or three or four times faster than the incomes out of which mortgages and rents are paid.

Nor can the household sector as a whole continue indefinitely to spend $1.14 for every $1 of income.

Household debt levels, relative to incomes, doubled during the 1990s and in the current decade have almost doubled again. This was not a sustainable trend and the past year has seen the inevitable correction.

The housing market dropped with a thud, retail spending contracted in real terms and the growth in household debt just about dried up.

As the recession drags on - three successive quarters and counting - the business sector has also had to pull in its horns.

"Businesses have been on a hiring freeze for the past year but we are now at the stage of the recession where jobs are being shed," said Goldman Sachs JBWere economist Shamubeel Eaqub.

He expects the economy to shed 75,000 jobs through 2009.

The job losses would not be confined to the inward-facing parts of the economy, where most of the employment gains of recent years had been, he said. "Increasingly external sector jobs, for example in tourism, are at risk."

Rising unemployment would compound weakness in the housing market and in consumer spending.

The Reserve Bank forecasts house prices, from their peak in late 2007, will fall 16 per cent by the end of 2010 in nominal terms or 24 per cent in real terms. So far we are about halfway through that decline.