Recession likely to stretch on

New Zealand's economy might be only halfway through a recession that has now already stretched to nine months, some economists say.

Statistics New Zealand figures show the economy shrank by 0.4 percent in the September quarter, confirming the economy's worst period of performance in 10 years.

However, the figure, already seen as somewhat historical given that we are nearly at the end of the December quarter, is slightly better than economists forecast, with most picking a 0.5 percent drop.

The latest figure follows drops in Gross Domestic Product of 0.3 percent in the March quarter and 0.2 percent in June.

The last time the economy shrank for three consecutive quarters was during the Asian crisis in 1998.

For the year to September, the economy grew by 1.7 percent.

ASB Bank economist Jane Turner said "at best" the country may be only a halfway through the downturn.

"We expect the economy to remain in recession through to mid-2009, but there is a growing likelihood of a more prolonged downturn," she said.

"Much depends on how badly the US (in particular) is disrupted and for how long. The next few months will give some idea of just how badly normal economic function has been dislocated there and elsewhere."

Goldman Sachs JBWere economist Shamubeel Eaqub said an unwanted build up of stock levels in industry had stopped the latest quarterly GDP figure being worse.

"Significant deterioration in local and global leading indicators suggests that the recession worsened in the fourth quarter and is likely to deepen further in 2009," he said.

BNZ head of research Stephen Toplis is picking a 0.6 percent contraction of the economy in the December quarter and a further negative outcome in the first quarter of next year.

He pointed out that the falls in GDP this country has seen so far have come before the worst impact of the global problems has been felt.

"The shock from the global economy will remain with us for some time to come. With exports accounting for a third of GDP this is a real worry," he said.

". . .We stick to our view that, eventually, the mass of monetary and fiscal easing assaulting the economy will pay dividends. But eventually is the key word in this sentence. "Put simply, 2009 will not be a Happy New Year for many. We're hanging out for 2010," Toplis said.

Our central bank, The Reserve Bank has already been taking the axe to interest rates in an attempt to bring life back into the flagging economy. Since July it has lowered official interest rates to 5 percent from 8.25 percent.

Today's figures will fuel expectations of further rate falls.

Economists have on average been predicting a half a percentage point fall in the rates when the RBNZ next reviews them in January.

But ASB's Turner said she expected a further full percentage point cut. "The run of news between now and then is likely to swing more people to expect the same," she said.