History shows recession will be short

By NICK SMITH - The Independent | Friday, 08 August 2008

New Zealand is in recession - we're just waiting for Statistics New Zealand figures to make it official.

But as Reserve Bank researchers Michael Reddell and Cath Sleeman point out, previous recessions make the present economic contraction seem shallow and short-lived.

The first oil shock from 1974 to 1977  which followed a drought so severe it is the second driest year on record  saw New Zealand's terms of trade drop 38%, a current account deficit of 13.4%, an annual growth slump from 7.2% to -2.6% and inflation of 17.6%.

The second oil shock, say Reddell and Sleeman, saw unemployment triple, a balance of payments blowout, falling terms of trade and a then unprecedented migration outflow that peaked at 400,000 in 1979.

National output went into freefall during the recession from 1991 to 1992, the pair report. Unemployment soared to 10.9% and real business and household activity fell away sharply.

Two successive droughts and the Asian banking crisis were the triggers for the 1998 recession, which saw the value of exports to this region fall  more than 26%, Reddell and Sleeman said. The important Asian tourism sector collapsed and GDP dropped  1% in the March quarter.

All of these crises coupled significant external shocks to domestic pressures or imbalances, they say, and ``are a sobering backdrop against which to consider the outlook for the New Zealand economy over the next year or two''.

Similarly, adds Westpac chief economist Brendan O'Donovan, this year's recession is due to four simultaneous shocks: oil, credit crunch, housing bubble and burst and drought.

``If we didn't have the drought, [avoiding recession] might have been a close-run thing,'' O'Donovan said.

As it is, he's picking three consecutive quarters of negative growth and a pick-up in the December quarter.

Drought is estimated to have sucked as much as $2 billion out of national production, he estimates. Oil prices have seen businesses and households spend an extra $1.3b at the petrol pump than they did a year ago, according to annualised June quarter figures. The burst housing bubble will have sucked $1.3b out of consumer spending, while the cost to the country of the credit crunch is difficult to quantify.

Given the economy generates about $180b in total, O'Donovan said, the impact of the four events on output is severe. It certainly threatens to be worse than the Asian crisis but, given the good economic indicators going forward, will be comparatively benign compared to 1991 and the two oil shocks.

Fiscal stimulus through tax cuts and Working for Families will provide an offset, while agricultural production is forecast to grow  7%.

Export receipts from dairy exports, according to government predictions, will top $12b next year and meat prices are surging. As the drought has broken, the electricity sector will no longer be a drag on growth as production recommences from the likes of Tiwai Pt aluminium smelter, Alexander said.