Economic recovery predicted

- David Pine | NZIJ RISK MANAGEMENT LTD


In his opinion, the recession was likely to be technically over by the end of 2009, but the effect of this would probably not be felt until mid 2010. There would follow an extended period where, rather than the economic cycle trending upwards, it would be more like the shape of a “bathtub with waves on the water”.

In other words, the economy would have its ups and downs before we would see a sustained upward trend.
Such a trend would require three things. First, there needed to be an acceptance that the world had changed permanently as a result of what was the most severe economic downturn since the 1930’s. This would enable trust to be restored between lenders and borrowers.

Second, full disclosure by all corporates of their true financial position was required. There was still a long way to go before this was achieved, mainly because many companies would hope for the best and not report bad news.

Third, the spiral of gloom needed to be lifted. Mr Bagrie noted that this last would not be helped in the short term by rising unemployment, which he predicted to rise in New Zealand to 7.5% to 8% from the current 5%.
In New Zealand, businesses were in comparatively good shape, but households were severely indebted. This was where New Zealand’s major adjustment would happen. It would involve households moving from debt-fueled consumption (mainly into housing) to an economy based on exports and investment.

Long term deposit rates and long term lending rates were likely to increase over the next few years, as control of the economy shifted from borrowers to investors.

For the future, Mr Bagrie saw New Zealand as being well placed in the global economy, through our ability to produce commodities that the world wanted, and being a pleasant place for tourists to visit.