Much has been heard recently regarding the ‘green shots’ of recovery. We remain unconvinced and continue to believe the global economy will take some time to return to anything near normal.

However, indicators of forward orders, employment and, yes, confidence, suggest the bottom of New Zealand’s recession may well have been reached. But the post-recession forecast is, at best, of modest growth.

Essentially, there are two options for a post-recession forecast for the New Zealand economy. One is export-led growth, the other is tilted more towards a recovery in domestic consumer spending.

We note that both official forecasters, the Reserve Bank of New Zealand (RBNZ) and the Treasury, are projecting an export-led recovery and are relatively pessimistic regarding the consumer spending outlook.

We express considerable caution as to export prospects, but hold a noticeably less pessimistic view for domestic consumer spending.

In particular, we note that the Treasury forecasts no less than four consecutive years of negative consumer spending growth (being a total 3 percent contraction in consumer spending over those four years). This foreshadows a dramatic change in the spending behaviour of New Zealand households.

As a comparison, the recession of the 1990s, with significantly higher unemployment, saw consumer spending contract in the three consecutive September years to 1992 by a total of 1.8 percent. We believe New Zealand households will not respond as drastically as in the 1990s, especially noting the relative fiscal easing. Consequently, our forecast recovery is more tilted towards a domestic spending bias, compared with either of the official forecasts. 

However, over the medium term we are less optimistic of a quick rebound to a 3 percent growth trajectory. In this context, as noted above we are not convinced by the ‘green shoots’ argument (or Consensus Forecasts) that the global economy will quickly rebound in 2010.

Our heightened caution regarding global prospects underpins our picture of a subdued New Zealand export sector. We also note the reduced capacity of many New Zealand exporters to immediately switch ‘on’ were the exchange rate to move in favour of exports.

Consequently, we are unable to replicate the RBNZ’s forecast surge of 5.6 percent and 8.1 percent export growth in the March 2011 and 2012 years. A rebound of this magnitude, following two consecutive years of 4 percent per annum contractions, would indeed be a stunning recovery.

Thus, our export forecasts are more muted, with an expansion of 2 percent forecast for the year to March 2011, followed by 2.9 percent in the March 2012 year. 

On the contrary, our short-term forecast remains slightly more optimistic than either the Treasury or the RBNZ forecasts. This is consistent with our less pessimistic view for employment, driven partly by the quick pick up in net migration inflows, and also from our knowledge of on-going regional infrastructure and related projects. 

Total employment in March 2009 was 16,600 more than in March 2008. Annual employment increases have been steadily declining since the increase by 38,000 two-and-a-half years ago, and over the last year have averaged 19,400. The 16,600 is just slightly less.

More recently there have been two parts to the economy: Auckland Region with a fairly strong employment decline, and the rest of the country, which continues to grow reasonably well.

The year to March 2009, saw employment in Auckland contract by 30,000 whereas in the rest of the country job numbers rose by 47,000.

It is clear that the engine for the growth of the New Zealand economy lies elsewhere. Perhaps, the Super-City tag may need to be re-visited. Without doubt, the new guardians of the Auckland metropolis have some work to do to earn that Super City tag they so dearly covet. 

However, the lagged effect of the downturn in economic activity will see employment growth recede further in the coming quarters. We forecast job growth to all but stall over the coming year, with only a net 2,500 new positions expected in the year to March 2010. The following year sees a further 6,000 added, before heading back to 20,000 in the March 2012 year.

But we also see a levelling-off in the rise in labour force participation rates. Changes in labour force behaviour have seen participation rates rise strongly over the past 15 years. This has been a driving (positive) structural change in the New Zealand labour market. Indeed, arguably, it is the success story for the New Zealand economy over this period.

The attraction and retention of previously excluded sections of the community into the workforce has also facilitated an increasingly flexible and dynamic labour market, as well as education and training provision. It is too early to assess whether the recession risks stalling such behavioural changes, but for those interested in long-term economic development the risk is very real.

In the shorter term, participation rates easing back from 68.5 percent to 67.5 percent, sees the official unemployment rate remain below the 6 percent mark. But this means unemployment numbers around the 125,000 mark for the remainder of the forecast horizon.

Our projection for GDP growth in the March 2009 year is for a fall of 1.7 percent, with expected bad news to continue throughout the first half of 2009. Thereafter, we expect activity to slowly improve, struggling to average 0.5 percent growth in the March 2010 year, and approaching 2 percent per annum for the following two March years. 

More longer term, improving the contribution of the external trade sector remains New Zealand’s biggest challenge. Export volumes for 2008 accounted for 31.1 percent of real GDP.

This was indeed a notably meritorious achievement, noting that the export ratio was only 23.9 percent in the 1989 calendar year. Unfortunately, this achievement is blotted when imports are incorporated into the equation.

Import volumes in 1989 were the equivalent of 20.6 percent of real GDP, a ratio that has now soared to 38.2 percent. Previously, we could blame our current account woes on an investment income deficit resulting from past failings. Now we have a trade imbalance as well.

New Zealand’s move into a systemic trade imbalance situation is evidence of a woeful ‘return’ on the policies of the last two decades. We note the OECD remains perplexed that while “New Zealand is paradoxically at the forefront of the OECD in adopting policies in many areas that have been shown to lead to high per capita income … it still ranks toward the bottom end of the OECD’s productivity league.”

It is reassuring though, that an improvement has indeed been registered over the past two decades, with our foreign currency credit rating rising from AA- in January 1990 to AA+ now.

 - Reprinted from BERL Forecasts June 2009