Jobless crisis could hit 11.2% - report

Prime Minister John Key's jobs summit will be warned unemployment could rise to 11.2 percent over the next two years - a rate that exceeds the most pessimistic forecasts and is higher than the number of jobless in the last significant recession in the early 1990s.

The warning comes from the New Zealand Institute in documents prepared for the summit, and is based on new research published in the United States last month on recessions originating in financial crises.

Institute research director Benedikte Jensen said work done by eminent US economist Kenneth Rogoff showed such recessions were prolonged and associated with "profound" declines in output and employment.

On average, real house prices declined 35%, with the decline stretching over six years. Equity market downturns lasted for at least three-and-a-half years and unemployment rose, on average, by seven percentage points.

Jensen said the 11.2% figure was the result of extrapolating these findings to the New Zealand situation. "And the present crisis is arguably more severe than any earlier banking crisis given its global scope."

"However, I am not suggesting unemployment will necessarily be that high," she said. Labour markets had become more flexible, meaning the impact of unemployment might be less extreme today than predicted on the basis of historical averages.

"But the research is challenging assumptions about how deep and serious this recession could be."

And the institute's own research, encapsulated in a paper entitled The emperor has no clothes: New Zealand's vulnerability in the face of the global economic and financial crisis, challenges assumptions on what will drive unemployment higher.

Treasury's latest economic forecasts, released in December, predict unemployment to peak at 6.5% in mid-2010. The 250 delegates to Friday's job summit in Auckland have also been told in official documents that unemployment will likely worsen to 7.5% because of weaker global growth, more rapid falls in commodity prices and pressure on the kiwi dollar.

However, the institute will tell the job summit that a lack of credit for businesses and employers remained the greatest risk for employment prospects.

Jensen said around $63 billion in bank funding would mature this year, with a large proportion of that over the next three months.

Bank lending to business had grown at an average annual rate of 12% in the past five years, and investment and employment would suffer if that slowed or stopped.

Keith Turner, chairman and front-person for the institute while it seeks a replacement for David Skilling as chief executive officer, said anecdotal evidence suggested banks were getting difficult about rolling over existing funding arrangements for business.

He said a rash of small business failures because banks were not prepared to ride through current tough conditions would be "a one-sided position for banks to take".

"They have been very happy to accept a government guarantee, but it seems they are not prepared to give a helping hand to business," said Turner. "If we can see a softening in the banks' position on this issue, then we could avoid a lot of small businesses going to the wall."

The institute says the government should place maximum effort on managing risks to strategic businesses from a sudden contraction in bank lending, although just how it should do this is being debated, even within the institute itself.

Rather than borrowing more and maybe putting the country's sovereign debt rating at further risk the institute says the government should look to its own balance sheet to finance investment in strategic New Zealand companies.

The institute's documents urge the creation of a NZ Growth Fund which would own the majority of SOEs and actively manage the $14b of SOE assets for growth.

Such a fund could sell down stakes in the SOEs to create a fighting fund to invest in growth companies as a last resort in situations where their loss would result in the greatest collapse in employment.

That is a prospect Turner, former chief executive of SOE Meridian Energy, does not support. Lumping SOEs under one umbrella would destroy the commitment and motivation of individual SOE staff that had been a great driver of value creation over the years, he said. 

- © Fairfax NZ News