Slowing Aussie economy seen as our biggest threat

19:15, Nov 27 2012

The economy is going through its slowest recovery from a downturn in 80 years, and the biggest risk is a slowdown in Australia, according to economic forecasting group NZIER.

In its latest Quarterly Predictions, NZIER says the trudge out of the gloom would take another two to three years.

In a slow and patchy recovery, the New Zealand economy is expected to grow 2.1 per cent in 2013 and only slightly better at 2.6 per cent in the following year.

Canterbury's rebuilding would add to growth but would take longer than most economists expected, NZIER said.

And the biggest risk to the outlook is a slowing Australian economy, hurting New Zealand exports.

Trade figures out yesterday showed exports to Australia - New Zealand's biggest market - were down 4.5 per cent in the past year. Australia accounted for about a fifth of New Zealand's exports, so a slowdown across the Tasman had big implications for exports, especially for manufacturers here.


Many of New Zealand's exports go to "non-mining" Australian states. So the slowdown in exports was less about the knock-on impact of the Chinese demand for minerals, but more about a slower domestic economy in Australia.

"It's clear the eastern states are slowing, the housing market is cooling and domestic demand is coming back. That's a pretty big risk for New Zealand traders," NZIER principal economist Shamubeel Eaqub said.

The eastern states of Australia had been in recession for about nine months, as the boost from extra government spending wore off.

"It is the downturn they never had" during the global financial crisis, he said.

Meanwhile, New Zealand's recovery from recession was unusual, in that it was the slowest in 80 years, with some indicators similar to the Great Depression of the 1930s, NZIER said.

The economy now was almost 10 per cent smaller than in previous recoveries, four years after they began. The level of jobs was about 5 per cent lower than expected under a normal recovery.

"That's a sizeable chunk of jobs," Eaqub said.

In more usual times there might be about 110,000 more jobs than there are at present.

The present recovery was different from others because it was such a big "debt bust", with the last one of this size during the Great Depression, he said.

Rather than the economy snapping back to a normal recovery, it would take a long time to pay down debt.

Households were gradually repaying debt, which reduced the risks for the economy, but there were signs of the housing market overheating, especially in Auckland.

"If the housing market falls, perhaps because of deteriorating global growth, it could tailspin New Zealand back into recession," NZIER said.

There was also a rapid hollowing out of uncompetitive businesses.