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New Zealand economy will not recover until 2010, bank predicts

Business Materials 11 November 2008 02:16 (UTC +04:00)

The New Zealand economy, which is officially in recession after two quarters of negative growth, is unlikely to make any substantive recovery before 2010, the Westpac Bank said in its latest economic review released Tuesday, dpa reported.

All sectors of New Zealand's economy face "some pretty big headwinds" as soaring credit growth and high commodity prices - two of the biggest factors influencing New Zealand's average 3.6 per cent annual growth in recent years - are now "collapsing in spectacular fashion," Westpac chief economist Brendan O'Donovan said.

He said that growth in 2009 was expected to be below 1 per cent, similar to the estimate for this year, despite aggressive action by the central bank to cut interest rates, a lower currency exchange rate, promised tax cuts and increased government spending, which would help spur economic activity.

O'Donovan said that falling fuel prices were helping consumers, but the housing market was still dropping, and unemployment would continue to rise.

"But more importantly, in a world shunning leverage, it is hard to imagine that New Zealand - one of the most indebted countries in the world - will not be forced to pare back on its debt appetite," he said.

"It seems clear that New Zealand faces a painful adjustment towards spending being more in line with what we earn. The mechanism for adjustment will be a lower exchange rate, tighter lending standards and reduced credit creation. This is the long overdue cure to the economic ill of excessive borrowing."

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