The new government is being urged to not back away from its plans to stimulate the economy through such measures as tax cuts, infrastructure spending and a relief package for workers made redundant.
With prime minister-elect John Key and his finance spokesman, Bill English, expected to get an update from Treasury this week on the state of the economy, Westpac chief economist Brendan O'Donovan warned yesterday the country's growth prospects have taken a turn for the worse.
History suggested that the average United States recession lasted 10 months.
Recent International Monetary Fund work highlighted that world recessions preceded by financial crises were generally deeper and longer-lasting - even more so when the recession was centred on consumers restoring their balance sheets.
On that basis, the current global downturn might deliver more than three years of "deeply sub-trend growth", similar to the 1982 global downturn where growth in the developed world was going backwards and developing economies were spluttering forward, he said.
"We expect the economic hardships of 2008 to spill into 2009. Aggressive action by the Reserve Bank will help to limit the losses, as will increased government spending and a lower exchange rate.
"However, any substantive recovery now looks unlikely before 2010."
Now was not the time for the Government to be tightening its belt, Mr O'Donovan said.
New Zealand was in a position that many other OECD economies would envy with debt levels remaining low by international standards.
It was clear that New Zealand faced a painful adjustment towards spending being more in line with what the country earned, he said.
The mechanism for adjustment would be a lower exchange rate, tighter lending standards and reduced credit creation.
That was the long-overdue cure to the economic ill of excessive borrowing.
The exchange rate was a major channel for softening the blow to the economy.
One of the benefits of a flexible exchange rate was that the currency could act as a shock absorber, dispersing the economic benefits in the good times and providing insulation to the economy in the down times.
Already the currency was helping offset lower commodity prices.
In New Zealand dollar terms, commodity prices lifted 0.7% in the month of October and were 8.2% higher than a year ago.
"Trying to pick the bottom of the exchange rate cycle is a futile task in this environment. At this point, we suspect that the New Zealand dollar could get to somewhere near the mid 40 cents against the US dollar."
The dollar was trading at 58.86c at 5pm.
Falling fuel prices were also providing some insulation to consumers but it appeared the housing correction had further to run and unemployment would continue to rise, Mr O'Donovan said.
The housing market entered a slowdown in late 2007 and by April 2008, market turnover was down 53% on levels in the previous corresponding period.
So far, falling interest rates had provided only a little relief.
Sales had risen slightly since April, but they were still a third lower than a year ago.
On a like-for-like basis, house prices on average across New Zealand had dropped close to 7% by October.
"We expect the annual pace of decline to reach 10% for 2008 with a peak-to-trough price decline in the vicinity of 15%. We do not expect prices to regain their 2007 levels until 2012."
House prices were still around 15% overvalued, based on current interest rates, inflation, rents and tax treatment.
The risk was for ever bigger house price falls if access to credit was further tightened, Mr O'Donovan said.
The labour market held the key in how severe and protracted the New Zealand downturn would be.
To date, the drop off in employment growth had been mild and the labour market was still in good shape.
The unemployment rate was relatively low at 4.2%.
Part of that reflected most disaffected workers had found alternative employment, quit the labour force or emigrated and as such, the rise in unemployment had been slow and steady.
But Westpac forecasts were a case of "you ain't seen nothing yet", he said.
"Our core view is that unemployment will continue rising over the next year - with layoffs most prominent in the retail, construction and finance industries - to a peak in early 2010 of around 5.6%."
That equated to 33,000 additional people out of work.
Given the weight of events to date, the risks were clearly for a sharper upturn in unemployment, the consequences of which could be nasty for the housing market and consumer spending.
For those who remained in work, Westpac believed wage growth would be solid, around 3.5% to 4%, until mid next year as inflation compensation continued to dominate higher unemployment.
