Put on your hard hats, MPs warned

'Vexatious winter' ahead

The Treasury has joined the chorus of warnings that the country may be in the grip of a recession as Prime Minister Helen Clark cautions her MPs of a "vexatious winter" ahead.

In a briefing to ministers, officials said growth was expected to fall to 1 per cent in the year to next March, down from the 1.5 per cent tipped in the May Budget. "There is a possibility the economy has experienced a technical recession in the first half of 2008."

That could slice $500 million from Government revenues, slashing the forecast $1.7 billion surplus. A technical recession is defined as two consecutive quarters in which the economy shrinks.

Treasury analysts said the economy was particularly vulnerable to continued high oil prices, which could rise further in the short term. As the warning was made, public pump prices for unleaded 91 rose 6 cents a litre to $2.19.

Labour heads into an all-day caucus strategy meeting today facing a crisis in the polls. Miss Clark said she would say to her MPs "hard hats on" as the Government wrestled with issues out of its control.

These included rises in fuel and food prices, high interest rates fed by fallout from the United States subprime mortgage crisis and this year's drought.

"If you are in Government and the international economy blows a cold wind you have to deal with it, and we are dealing with it."

The Retailers Association said yesterday that times were tough for households, but some retailers were still doing well.

However, economist Anthony Byett said slow growth in credit card and eftpos billings showed consumers were managing higher costs by closing their wallets.

Oil prices at $145 a barrel are 30 per cent, or $35 a barrel, higher than when the Budget was finalised in mid-April. Since 2000, prices have risen 180 per cent in NZ dollar terms. The Treasury said petrol prices would eventually fall as consumers and producers responded to high prices, though it could take five to 10 years.

Weak consumer spending in the March quarter, during which the economy shrank by 0.3 per cent, would probably persist in June and September quarters. Figures for the June quarter will be issued at the end of September.

The economy was expected to expand in the second half of the year, thanks to the October 1 tax cuts and increased dairy payouts.

Reserve Bank governor Alan Bollard said last week that the economy would be flat in the second quarter before a "soft pick-up" later in the year.

Council of Trade Unions economist Peter Conway believes the economy is in recession. "It is hard to believe that the June quarter will be better than March."

Treasury data suggested a good pickup in the second half of the year. "If 1 per cent is the bottom of the cycle, then given international aspects ... that's not a bad place for the bottom to be, though that's not much of a consolation for people losing jobs." 

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