New Zealand Economy May Take Time to Recover

In the first quarter of 2009, New Zealand’s economy shrank by 2.7 percent from a year earlier, the most in more than 18 years. And although some indicators suggest that the worst is over, the country has yet to show evidence of sustainable growth.

Indeed, in the second quarter of 2009, New Zealand's business confidence improved and consumer confidence rose to an 18-month high. Also, the housing sector seems to be picking up. For example, the number of properties sold increased 40.3 percent in June from a year earlier. Most importantly, annual immigration increased to a two-year high, which may fuel up consumer spending and housing demand and help the economy recover from a recession.

Nevertheless, firms and households are cutting spending and increasing savings in response to high debts, falling asset prices and job losses. In the first quarter of 2009, unemployment rate raised to six-year-high of 5 percent. Moreover, household spending, which makes up 60 percent of the economy, fell 1.4 percent in the first quarter, the most in 18 years. Also, purchases of durable items such as cars, furniture and home appliances dropped 2.5 percent while spending on services also decreased.

Looking further, interest rates cuts do not seem to have brought any sense of relief. After all, annual inflation is still running at 3 percent. 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.

New Zealand Economy May Take Time to Recover

Anna Fedec,
7/9/2009 4:21:08 PM