The economy should start recovering later this year, but key indicators such as the number of unemployed may not peak until the middle of 2011, according economic forecasters the New Zealand Institute of Economic Research (NZIER).
In its quarterly predictions, NZIER expected the recession to continue through to the September quarter before stimulus from monetary and fiscal policy and migration-induced population growth drove a recovery from later this year.
NZIER principal economist Shamubeel Eaqub said the economy would contract 1.4% in the March 2010 year following a 2% decline in the year to March 2009.
Quarterly growth would return to positive figures from the December quarter but remain negative on an annualised basis.
Mr Eaqub said for the five years from 2010, he expected the economy to grow 3.5% a year on average.
However, there would be lag effects.
"Despite our forecast of a seemingly strong recovery, the impact of the recession will take some time to unwind."
The number of people joining the unemployment queue would peak at 7.8% in mid-2011, while the financial benefits of a stronger economy would take time to be felt in terms of household income.
Pre-recession trends in terms of real gross domestic product (GDP), or economy-wide income per capita, would not to return until late 2011, Mr Eaqub said.
Even then it would be below that enjoyed for the past decade, with annual income per person expected to be $10,500 lower for the next five years.
Business profitability would remain low and trading difficult, and it would be some time before companies could regain margins.
"Profitability is likely to remain a challenge given subdued demand and reduced pricing power. Cost-reduction strategies may be required for some time yet."
Mr Eaqub forecast a migration gain of 27,000 for the year until the end of 2009, mainly from fewer people leaving New Zealand, especially those going to Australia, where the labour market had weakened.
"The departure rate is expected to slow quite significantly in the short term."
The greater number of people staying here would boost the volume of houses sold but not the price as prices were still overvalued when assessed historically and on an income and affordability basis, he said.
"We are hoping house prices will fall pretty gently or stay relatively flat and income will catch up."
The exchange rate would continue to fluctuate but had started to rise as investors regained their appetite for risk, Mr Eaqub said.
Historically, it has taken four years for the exchange rate cycle to track from peak to trough. It peaked early last year, leaving another three years to bottom out, boosting exporters for a sustained period.
