New Zealand Economy Could be in the Brink of Depression

In the last quarter of 2008, New Zealand’s economy shrank by 1.9 percent from a year earlier, the most in more than 16 years. What is behind this slump and what can be done to stop it?

New Zealand's economy slipped into a recession in the first quarter of last year amid a drought, high energy costs and a slump in the housing market. A fast deterioration in global growth also caused weakness in flagging exports of milk, meat, timber and wool.  In addition, the highest unemployment rate in five years and discounted expectations of further deterioration of the economy are making consumers to cut spending.

Since July 2008, the Reserve Bank of New Zealand has slashed interest rates by 475 basis points. But those interest rates cuts do not seem to have brought any sense of relief. After all, annual inflation is still running at 3.4 per cent. What's more, 85 percent of New Zealand home loans are fixed, so rate cuts don't have immediate effect on financing costs. In addition, New Zealand has high household debt levels, which are similar to the US and UK, run at 160 per cent of disposable income. Having said that, even if some sort of stimulus packages is introduced in the near future, it is not likely that consumers will borrow more since they are currently fighting with previous debts.

Anna Fedec,
4/2/2009 6:02:25 PM