Published: October 2009

The outlook continues to improve…

There are clear signs of a rebound in the New Zealand economy.  A number of leading indicators have continued to improve over recent months and point to further growth over the second half of 2009.  Business confidence, as measured by both the National Bank Business Outlook (NBBO) and the Quarterly Survey of Business Opinion (QSBO), is now at its highest level since 1999 when the economy was recovering from the Asian Financial Crisis (Figure 1).  Rising net migration, increased activity in the housing market and a brighter global outlook all point to signs of recovery.

Fig 1: Business Confidence

Source: National Bank. NZIER

Data table for Figure 1

Fig 2: Economic Growth

Source: Statistics New Zealand

Data table for Figure 2

…as the New Zealand economy exits recession...

The June 2009 quarter was the first quarter of economic growth since December 2007.  From its peak, economic activity fell 2.9% over five quarters, making the recession both shorter and shallower than most forecasters had previously expected.  While the recession has been severe, it has not been as deep as the 1990/91 recession where the economy contracted 3.3% and not as long as the 1976-78 recession which lasted for seven quarters.  New Zealand has also fared relatively well internationally, not suffering the large contractions seen in a number of other countries.

Economic activity increased by 0.1%in the June 2009 quarter, against expectations of a fall of 0.2% (Figure 2).  Primary industry activity (up 1.5%) and electricity generation (up 5.9%) were the key drivers of growth over the quarter.  This was offset by declines in activity for manufacturing, construction, wholesale trade and transport & storage services.  

…although the labour market will lag…

The latest NBBO and QSBO results both show that firms are intending to keep staff numbers at current levels.  This may signal that job destruction has slowed, but may also suggest there is little sign of job creation.  Employers may be waiting to see if the recovery will be sustained before hiring new staff.  As a result, we could see employment losses begin to slow in the near future, but unemployment continue to rise as new entrants to the labour force struggle to find work.  Early indications from administrative data suggest that redundancy payments may have peaked and are now falling. 

Long-term unemployment is a concern…

While the unemployment rate is now expected to peak below where many had previously forecast, it is likely to remain high for some time.  The number of people receiving the unemployment benefit and the number of discouraged workers continue to increase, which provides further evidence that the recovery in the labour market will lag that of the wider economy.  A key issue will be monitoring the number of people who are long-term unemployed, which is currently at its highest level since 2004 (Figure 3).

Fig 3: Long-term Unemployed

Source: Statistics New Zealand

Data table for Figure 3

…with the unemployment rate expected to peak around 7%…

The unemployment rate is expected to peak below levels previously predicted.  Both Treasury and the Reserve Bank have recently reduced their estimates of the peak unemployment rate.  The Department of Labour continues to expect the unemployment rate will peak at around 7% in mid-2010.  The release of employment and unemployment data for the September 2009 quarter is scheduled for November 5.

…although workers are more optimistic…

Workers are also more positive about the outlook for the labour market.  The Westpac Employment Confidence Index rose in the September 2009 quarter and is now back in positive territory for the first time since 2008.  While employees remain downbeat about current labour market conditions, their employment outlook for a year ahead rose to its highest level since December 2007. 

…despite expectations of a subdued economic recovery

The economic recovery is likely to be subdued compared with previous recessions with unemployment continuing to rise into 2010.  Economic activity is not expected to return to its past peak until late-2010.  For the year to March 2011, the average prediction in the September NZIER Consensus Forecasts is for the economy to expand by 2.7%.

There is some uncertainty about the shape of the economic recovery in New Zealand and globally.  Most expectations are for a modest and gradual recovery in the New Zealand economy.  Households accumulated significant debt over the last economic expansion and are attempting to reduce their debt by lowering their discretionary spending, which will take some time.  Furthermore, weak global demand and the strong exchange rate are hindering the ability of the export sector to drive growth and compensate for a weak domestic sector.  As a result, the economic recovery is not expected to be the classic “V” shape recovery that has been seen in previous recessions where growth rebounded strongly.  Instead, growth is expected to be positive, but relatively subdued over the next two years.