Recession threat from austerity

A new age of household austerity is threatening to push New Zealand back into recession but economists insist the recovery is progressing.

A major business survey released yesterday showed confidence in the private sector plunged in the three months to the end of September, a period in which far more companies saw a fall in activity than an increase.

The quarterly business optimism survey from the New Zealand Institute of Economic Research revealed a "synchronised slowdown across regions and sectors".

NZIER principal economist Shamubeel Eaqub said the fall in activity implied that the economy contracted by 0.2 per cent in the third quarter, even before the disruption caused by the Canterbury earthquake was factored in.

A recession is defined as two consecutive quarters of falling gross domestic product, meaning that if there was another contraction in the final three months of the year, New Zealand would be in a "double-dip" recession.

Mr Eaqub said the chance of a double-dip recession was "50-50" but much depended on the reconstruction effort from the Canterbury earthquake.

Yesterday's commentary from NZIER painted a bleak picture of the economy, with overall business confidence falling from 26 per cent positive to negative 9 per cent, meaning more businesses were pessimistic than optimistic.

It is the first time the survey has showed net pessimism in more than a year.

"There was no evidence of a pre-GST [increase] spend up at shops. Large firms, which had been recovering strongly, fell sharply, and small firms remained in the doldrums.

"Business profitability is deteriorating again; highly unusual for this stage of the recovery. This may weigh on future hiring and investment although hiring and investment intentions remain encouragingly resilient."

While many commodity prices – in particular dairy – continue to boom, the domestic economy remains weak as farmers and households focus on paying down debt, even before the recent changes to the tax system, which were designed to encourage saving.

Mr Eaqub said the move to pay down household and corporate debt was hurting the economy at present, but the process would leave the economy in a better position.

"We can't really encourage households to spend more, because they're doing the sensible thing – they have cut back, they are paying down debt. This is a good thing for the long term, but in the near term it really hurts."

ASB economist Chris Tennent-Brown said this week that households "are doing what we wanted to do throughout the whole boom, which was to live within their means, consume a bit less. Now that they are, it's a bit hard to say this is alarmingly weak and there's going to be another recession".

Craig Ebert, senior economist at Bank of New Zealand, said while GDP figures were likely to be disappointing, it was important to take into account other factors in the economy, such as the reduction in household debt, and rebalancing the economy towards export-led growth.

"Are we making progress, are we getting on top of things? I think for the most part we are, even though [growth is] disappointing compared to earlier expectations."

- © Fairfax NZ News