New Zealand economists can not agree on recession forecasts, ranging from 20% to a more than 50% chance this year through to the country having the resilience to survive a US-driven recession.
The firesale of investment bank Bear Stearns through a $US236 million deal, underwritten by a US Federal Reserve guarantee of $US30 billion, has prompted a Monday sell-off of shares around the world as investor anxiety increases.
Minister of Finance Michael Cullen yesterday said he did not rule out the possibility of recession hitting New Zealand with potential for two consecutive quarters of negative economic growth, sometime during the next 12 months.
The present global credit crunch - lack of money for lending globally and subsequent spiralling interest rates - resulted from the exposure of banks to the US high risk subprime market crisis which began to unravel in mid-2006.
When the terms for borrowers on ‘‘teaser'' subprime mortgages of 2% to 3% came up for renewal they had to begin paying market rates beyond 5% to 6%, which included the compounded interest added to the capital borrowed, prompting record numbers of foreclosures in the US housing sector.
Complex packages of the subprime mortgages had been onsold into the markets and campanies' exposure to this market has been unravelling since, spooking investors who wanted their investments in less riskier sectors.
BNZ senior economist Stephen Toplis said the Bear Stearns' near collapse was not picked, however, it was the sort of event expected in the present climate.
Mr Toplis has not revised a prediction last week that there was a more than 50% chance of recession - two consecutive quarters of negative economic growth - hitting New Zealand and that the third and fourth quarters remained ‘‘likely candidates''.
Westpac chief economist Brendan O'Donovan said although there remained a ‘‘great deal of uncertainty'' in the markets and there was always potential for a recession, his forecast for a New Zealand recession remained at a 20% chance.
He said New Zealand had shifted its export reliance toward China, Australia and the petro-economies, such as the Middle East, Venezuela and Indonesia, who are better placed to resist a US-led recession.
‘‘We've hitched our wagon to that horse. We once exported 40% to the industrialised G7 nations but that has fallen to 33% to G7's,'' he said.
Before a recession struck there were several factors to consider: where the Reserve Bank could drop interest rates to stimulate growth, if a falling New Zealand dollar would stimulate exports and if there were Government fiscal methods to employ, such as tax cuts.
‘‘We have the resilience. New Zealand exports to China were up from 3% to 6% and from 5% to 8% in general to the petro-economies,'' he said.
There were many negative factors in place with higher petrol costs, household debt and food costs, however, the country maintained a strong labour force, good job security, steady wage growth, was likely to get tax cuts from October.
