Recession almost over - NZIER

The current recession sparked by high energy and food prices and rising interest rates is unusually widespread, but it is almost over, according to research group NZIER.

The rebound from a nine-month slowdown this year will make economic growth return to about 4 per cent in a couple of years, according to NZIER's long-term forecasts. "We believe the bottom of the cycle has been reached."

But the full recovery to "robust economic health" will not be quick. Relatively high interest rates are expected for some time, which will hold the currency up and keep a lid on investment and job growth.

In the March quarter the economy declined 0.3 per cent - the first fall in two years. NZIER expected the contraction to continue through the September quarter.

It said the recession was unusual because the spending slowdown was widespread, across consumer spending, business investment and the export sector. Usually only one sector leads the way.

"This time, all three areas have chimed in together. The economy has been hit by a salvo of self-inflicted and external negative factors."

However, energy and food price rises are now past their peak and interest rates have started to ease down slowly, pointing to a recovery, NZIER says.

The Reserve Bank is expected to announce its next cut to official interest rates on September 11, after cutting rates to 8 per cent on July 24.

Market pricing suggests the cash rate will be down to 6.5 per cent within 12 months.

NZIER says wages are expected to keep rising, despite the economic slowdown. Tax cuts, which come in next month, will boost consumer confidence and spending.

If National is elected, a second round of tax cuts is promised early next year.

"All these factors will support a return to growth in private consumption," NZIER says.

ANZ National Bank said there were signs of a recovery, such as improved business confidence, but they pointed to anaemic growth, built on expected interest rate cuts.

But the central bank still needed to see subdued growth to tame inflation so "a firm recovery cannot yet take hold", ANZ economists said.

The economy was set to rebound early to mid next year, but the speed of the recovery remained uncertain as households tightened their belts, it said.

Meanwhile, NZIER says the property market is not expected to fall much more, as private investors are expected to look for safe havens away from things like finance companies.

"The sharemarket is unlikely to be an attractive alternative to many of these people."

However, Bank of New Zealand economists said that there was a strong trend down in building consents, which was expected to continue in the second half of the year.

Household borrowing also grew at an extremely slow pace in July, with household claims up by just 0.3 per cent for the month, which was the weakest increase since 1991.

That was "hardly an indication that the housing market is going to find any traction any time soon", BNZ said.

- © Fairfax NZ News