The New Zealand economy has been forecast to suffer a short, relatively sharp nine month recession before emerging from the slump late this year.
According to the New Zealand Institute of Economic Research the economy will probably emerge from a nine-month recession in the fourth quarter.
The economy, which shrank 0.3% in the March quarter, will probably contract in the second and third quarters as well, according to a statement yesterday from Institute executive director, Brent Layton statement posted on the web site.
He said indications were that New Zealand was currently experiencing a recession with real GDP likely to decline for the three consecutive quarters starting from the March quarter of this year.
It will start growing in the December quarter, but it will be constrained by high inflation and low levels of demand.
Mr Layton said people should not expect a quick return to "robust" levels of economic growth very quickly.
NZ’s recent rate cut, slowdown and the emergence of a rotation out of high yielding economies by global investors has seen the New Zealand dollar take a battering along with the Aussie dollar as well). The Kiwi has tumbled to around 69 US cents in the past two months since the July rate cut.
In the March 2008 quarter, real GDP declined 0.3%, which was the first negative quarterly growth for the past two years.
"Most recent domestic trading activity indicators from NZIER’s Quarterly Survey of Business Opinion (QSBO) suggest that real GDP declined in the June quarter, and is likely to decline again in the September quarter” Figures for the June quarter will be published on the 26th of this month.
The economy has been hurt by the now usual combination of high interest rates, a drought; high fuel and food costs, the impact of the credit crunch and a pricking of the housing and property boom.
"We believe the bottom of the cycle has been reached,” said Layton, noting that fuel prices and interest rates are declining and income taxes will be cut from the first of next month, a point emphasised in recent weeks by the country’s Finance Minister, Michael Cullen and also highlight in comments from Reserve Bank Governor Alan Bollard.
He cut the RBNZ’s key rate in July for the first time in five years and said further reductions are likely as the economy slows. Some commentators say that another cut this month is possible. The central bank meets Thursday week.
Layton said the ability to move interest rates much lower is constrained by the outlook for inflation and New Zealand is likely to have relatively high borrowing costs "for some considerable time,” which will support the currency and constrain investment.
Governor Bollard said in July that annual inflation will probably accelerate to a 19-year high of about 5% this quarter, or in the December three months, before easing in 2009.
Mr Layton said in his statement that the current recession "is unusual in that the slowdown in economic activity has been spread across the major areas of expenditure. Often one of either consumption, investment or the external sector leads the way.
"This time, all three areas of expenditure have chimed in together. The economy has been hit by a salvo of self-inflicted and external negative factors.
"Private consumption has been affected by high prices of energy and food and higher interest rates and falling house prices.
"Real private consumption declined 0.4% in the March 2008 quarter, which is the first contraction in this component of GDP in the past three years.
"Total investment declined 2.0% in the March 2008 quarter, which is the first negative growth for this activity in two years. Housing investment has fallen as house prices have fallen and net migration has dropped.
"Although export prices have remained relatively good, the volume of exports of goods and services declined 1.8% in the March 2008 quarter.
"This was driven mainly by a 3.8% decline in the volume of dairy products exports due to lower production as a result of last season’s North Island drought. On the other hand, import volumes have remained strong.
"We believe the bottom of the cycle has been reached. The increases in energy and food prices appear to be past their peak.
"Interest rates have started to ease, albeit slowly. Wage growth, which always lags behind the conditions in the labour market, will remain high.
"The tax cuts in October will boost consumer confidence and spending. All these factors will support a return to growth in private consumption.
"Moreover, we think the property market will not fall much further from around current levels.
"We think it will be supported by private investors looking for safe havens for their funds which they are now very reluctant to leave with finance companies.
"The share market is unlikely to be an attractive alternative to many of these people.
"While we think the bottom has probably been reached and the economy will get better in the short-term, we do not think full recovery to robust economic health will be quick and without further adjustments.
"Inflation is still high, and likely to go higher.
"More importantly, we think the Reserve Bank in lowering rates in July has fed inflationary expectations and as a result the ability of the Bank to move rates much lower is constrained.
"We are likely to have relatively high rates for some considerable time and this will tend to support the
