Unemployment could exceed 7pc

12:53, Jan 28 2009

New Zealand's unemployment rate could skyrocket past 7 percent as the world recession bites, with little the Reserve Bank can do this morning to mitigate the distress that households will face.

Kiwis will be increasingly at the mercy of an economic whirlwind this year that has severely damaged Northern Hemisphere countries despite central bank rate cuts there.

The wider economy yesterday took a $3.1 billion king hit through global dairy giant Fonterra's reduced forecast payout of $5.10 a kilogram of milksolids, well below last year's record payout of $7.90.

Whether that crumbling payout will do anything to alter Reserve Bank of New Zealand governor Alan Bollard's view on how much the official cash rate should be slashed is hard to say. But his view on the growth problems that New Zealand faces will be seen with his official cash rate review at 9am this morning.

Most economists expect a 100-basis point cut from 5 percent to 4 percent. However, some expect 150 basis points, and Westpac chief economist Brendan O'Donovan said he would not be completely surprised if it came in at a 200-point cut.

The bank has already cut the rate by more than most other countries from a peak of 8.25 percent, helping homeowners with mortgages.


But even further cuts to a possible rate as low as 2.5 percent will do little immediately to avert the jobs and confidence crisis that will hit Australia and New Zealand this year, economists say.

Instead, the Reserve Bank will just provide some cushion from an even worse spiral into recession for two countries that have been relatively unscathed from what is happening in Europe and the United States, where a daily bloodletting of jobs is under way. This month alone, US companies have announced more than 211,500 staff cuts.

The global economy is facing its steepest fall in decades, with the kiwi dollar under pressure in the past eight weeks as overseas investors pull back into perceived safer assets and currencies.

BNZ currency strategist Danica Hampton said Fonterra's latest forecast, down 90 cents on November's forecast, had been expected by the market, and the currency had not really reacted, except that Fonterra's outlook was more negative than expected. The dairy exporter is responsible for about 20 to 25 percent of export earnings. The kiwi could possibly fall below US50c in the next few weeks, if the world economic picture continued to deteriorate, she said.

Economists and financiers say businesses are aware of how bad a prolonged downturn could get in New Zealand, but the public is not.

National Bank chief economist Cameron Bagrie said all that policymakers the Government or Dr Bollard could do was mitigate some of the extreme downside risk for the country.

They would not be able to avert a severe downturn. "They're trying to soften both the speed and extent of the downturn, as opposed to averting one."

New Zealand was about to see the real economic consequences of a financial crisis.

"You're seeing falling commodity prices, you're seeing falling demand, the outlook for tourism is looking very tough and the [low] availability of credit. . ."

These were all "coming home in 2009".

"The best that policymakers can do in this environment is kind of hope that the old bungy cord at some stage gets attached."

Mr Bagrie said he had raised his expectations of an increase in unemployment above 7 percent, from 4.2 percent in the September quarter. "I think the unemployment rate's going to 7 percent." Severe job cuts would exacerbate the extent of the downturn, he added.

BNZ economist Tony Alexander said he expected the unemployment rate to go to about 6.5 percent, with the Reserve Bank only able to act as a buffer to economic events.

"They can never prevent economic forecasts from coming through. All they can do is provide some insulation, the same as with fiscal policy, tax cuts, increased spending or whatever.

"But the Reserve Bank, there's no way they can stop the unemployment rate going up. . . they can just ease the pain somewhat," Mr Alexander said.

The Dominion Post