NZ to stay in recession next year - OECD

01:43, Jan 31 2009

New Zealand's economy will remain in recession next year before lower interest rates, increased government spending and higher exports help to stimulate gross domestic product growth, the OECD said.

The Organisation for Economic Co-operation and Development, whose 30 members are mostly high-income countries, said in its biannual economic outlook that Australia's economic growth would likely to slow next year, while unemployment is set to jump, dented by the fallout from the financial crisis and a darkening outlook for the world economy.

For New Zealand, the OECD forecast GDP growth at 0.5 per cent in 2008, cut by a third from its June report, and then contracting by 0.3 per cent in 2009, slashed from a previous forecast of 2.1 per cent growth.

Inflation was seen at 4 per cent in 2008, slowing to 2.3 per cent in 2009. Inflation hit an 18-year high of 5.1 per cent in the year to Sept. 30.

"Despite a near-term boost from tax cuts and a bounce back from drought, only modest macroeconomic improvement is projected until mid-2010," the report said.

It noted the year has so far seen a sharply slowing housing market, job losses, and a large current account deficit, which will take time to be resolved.

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The Reserve Bank of New Zealand (RBNZ) has cut rates by a total of 175 basis points since July to help the economy and is expected to cut by at least a further 100 basis points to 5.5 per cent at its Dec. 4 monetary policy statement.

"Australia's GDP growth could well weaken from 2.5 per cent in 2008 to around 1.75 per cent in 2009 before picking up to 2.75 per cent in 2010," the OECD said.

"The international financial crisis and the delayed impact of the restrictive monetary policy in place up to the third-quarter of 2008 should contribute to keeping growth fairly sluggish until mid-2009."

It echoed the views of Australia's central bank, which earlier this month cut its forecasts for GDP growth in 2009 to 1.75 per cent, from 2.5 per cent estimated a few months earlier. The country grew at 2.7 per cent in the year to June 2008.

The Reserve Bank of Australia (RBA) has already slashed the cash rate by 200 basis points between September and November, taking it to 5.25 per cent. The federal government has also announced a $10.4 billion ($6.7 billion) pre-Christmas stimulus package to help struggling households and pensioners.

The OECD expects the slowdown to push up the jobless rate to 6 per cent while sluggish domestic demand and falling oil prices would combine to tame inflation.

Australia's consumer price index climbed to 5 per cent last quarter, well above the central bank's 2-3 per cent target range.  

Reuters