'Headwinds' will slow NZ to a crawl

The economy will be barely crawling next year, growing just under 1 percent, as New Zealand is hit by collapsing credit growth and falling commodity prices, Westpac Bank says.

The economic hardship of this year, with recession in the first six months, was expected to spill into next year, though growth would be positive, Westpac said.

Even so, growth would be much lower than the recent average of 3.6 percent a year.

High export prices and soaring credit growth boosting the housing market had been two of the biggest drivers of the economy in recent years.

The "big bang" in financial markets recently meant credit growth had almost stopped and commodity prices were "heading south at a rate of knots", it said.

"These developments represent some pretty big headwinds for New Zealand," Westpac chief economist Brendan O'Donovan said.

New Zealand's Achilles' heel was its reliance on foreign lending, spending more than it earned and borrowing the rest overseas, the bank said.

In the past two months, United States lending markets had almost closed. As they reopened, Westpac warned, New Zealand banks might find terms tighter and loans more expensive.

It might also be tougher for businesses to borrow for investment and harder for home buyers to raise a mortgage. House prices could fall even faster.

There was a risk of business investment "paralysis"; unemployment would rise about 33,000 to 5.6 percent; and house prices would drop 15 percent, Westpac said in its Economic Outlook report.

House prices were still 15 percent overvalued, based on present interest rates, inflation, rents and tax rates, it said.

The global economic downturn might mean three years of slower growth than normal, similar to 1982, when "the developed world was going backwards and developing economies were spluttering forward on one cylinder", Mr O'Donovan said.

"Any substantive recovery now looks unlikely before 2010." Even in 2010, growth would be just 2.2 percent.

However, Westpac said it expected aggressive interest rate cuts by the Reserve Bank, a falling Kiwi dollar, increased government spending and lower petrol prices to help limit the losses.

A lower dollar would make imports more expensive and encourage people to consume less, as well as protecting farmers from falling world commodity prices.

World prices for New Zealand's main exports suffered their biggest one-month fall in more than 20 years last month, down 11 percent on last year.

However, that was more than offset by a lower Kiwi dollar, with returns in New Zealand dollars still up 8 percent on a year ago.

Mr O'Donovan said world growth forecasts for next year had been slashed. "That is bad news for New Zealand's growth prospects over the next few years."

Rate cuts, tax cuts and infrastructure spending were "more likely to stop the rot than boost activity" in the coming year, "but a huge amount of uncertainty remains".

- © Fairfax NZ News