Black hole or pot hole?NZ and the world economy in 2009

Donna PurdueSenior EconomistMarch 2009

Key discussion points

• Global – this is not your usual recession

• NZ – some insulating factors but 2009 will be

tough

• NZ interest rates and currency have more work

to do

• Highly uncertain and risks aplenty

-2

-1

0

1

2

3

4

5

6

7

1961 1967 1973 1979 1985 1991 1997 2003 2009

% chg

-2

-1

0

1

2

3

4

5

6

7% chg

Sources: IMF, Westpac Economics

Average since 1960: +3.9%

World growth collapsed

Peak-to-trough changes in severe financial crises*

* Argentina (2001), Colombia (1998), Hong Kong (1997), Indonesia (1997), Korea (1997), Malaysia (1997), Philippines (1997), Thailand (1997), Japan (1992), Finland (1991), Sweden (1991), Norway (1987), Spain (1977), US (1929)

†Excludes Japan ‡ Percentage point, trough to peak

Sources: Reinhart and Rogoff, The Aftermath of Financial Crises, 2009. The Economist

Cumulative change, % Duration, years

Real house prices -36 6.0

Real equity prices -56 3.4

Unemployment‡ 7.0 4.8

GDP per person -9.3 1.9

Insulating factors back home

• Exchange rate a key buffer

• Our exports - we export basic stuff

• Fiscal stimulus

• Wealth effect more mild – housing and financial

• Robust banking system

• Credit channel still working

• Monetary pass-through

GDP growth

-3

-2

-1

0

1

2

3

4

5

6

7

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

%

-3

-2

-1

0

1

2

3

4

5

6

7

8%

Qtr % chg

Annual Average % Change

Source: Statistics NZ

Forecasts

Critical factors/areas of risk

• The actual severity of the global recession

• Availability of credit

• Increased protectionism

• The scope and effectiveness of policy

• Longer term: inflation

Employment confidence

0 20 40 60 80 100 120

Nelson Marlborough - Westland

Gisborne - Hawkes Bay

Southland

Otago

Taranaki - Manawatu

Canterbury

Wellington

Auckland

Northland

Waikato

Bay of Plenty Source: Westpac McDermott Miller

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Global interest rates slashed

0

1

2

3

4

5

6

7

8

9

10

2002 2003 2004 2005 2006 2007 2008 20090

1

2

3

4

5

6

7

8

9

10

NZAustraliaEuroUS

Source: Bloomberg

index Jan 1998 = 100 index Jan 1998 = 100

Huge fiscal policy response