The OECD released its latest Economic Outlook, no 84 on 25 November 2008 which included the following summary of its economic forecasts for New Zealand:
"New Zealand has entered recession ahead of other OECD countries, a victim of simultaneous domestic and foreign shocks. The outlook remains subdued because the large macroeconomic imbalances built up over the past decade -- inflation, housing overvaluation, high household debt and a huge current account deficit -- will take some time to unwind.
Macroeconomic policies are in a good position to cushion the downturn. Tight monetary policy, in place for some time, is now being eased at a rapid pace, and a fiscal expansion is starting from a point of significant surplus and low debt. It will be important to maintain the strong inflation targeting and fiscal sustainability frameworks and to facilitate the shift of resources to the tradeables sector."
The OECD's GDP forecasts for New Zealand were cut by a third to 0.5 percent for the calendar year 2008 and from 2.1 percent to 0.8 percent in 2009 from the previous round of forecasts. Only a small improvement to 1.9 percent growth is expected in 2010.
Inflation that hit 5.1 percent in the September quarter is projected to fall away to 2.3 percent by the end of 2009.
But the deflation beginning to grip the world economy will see a widening of the current account deficit to 9.5 percent of GDP by the end of 2008 with only a small improvement to a deficit of 7.6 percent of GDP in 2009. Unemployment is forecast to reach 5.4 percent by the end of 2009 and 6.0 percent in 2010.
On the plus side, New Zealand's macroeconomic policy settings have positioned the country to absorb the economic shock better than when it entered previous cyclical downturns. The low public debt as a percent of GDP, currently around 17% of GDP, provides a fiscal cushion and permits more room for a larger fiscal expansion than the new National government is likely to contemplate, but circumstances could change that stance.
Where policy settings could be criticised is in the area of monetary policy where the ill-conceived single-minded focus on inflation targeting has blinded the Reserve Bank somewhat to the need for a faster and more expansionary monetary stance. That said, it is to the country's benefit that a more enlightened Governor, Alan Bollard, is at the helm rather than his more ideologically-blinkered predecessor, Don Brash.
Like the official New Zealand economic forecasts released in the last month or two, the OECD forecasts likely underestimate the gravity of the economic situation facing both New Zealand and the world economy. The unwinding of the debt crisis in the US and its ripple impact on the rest of the world will likely take longer and involve a steeper plunge in economic activity than these sets of forecasts indicate.
The track record of economic forecasting is that forecasters are notoriously bad at picking the timing of economic downturns but even worse at estimating how deep the economic decline is in severe downturns.
US economic commentators are picking the current recession to be as bad as the W-shaped recession of the early 1980s - essentially 2 recessions, 2 VVs make a W! - but the structural change being wrought through the financial sector in many economies is more likely to result in an recession more like the magnitude of 1973-1975.
[Personal note - this is not a kuaka (godwit) twittering away, but the analysis of a macroeconomist who studies the business cycle. And, if I may be immodest, who warned in an economics article in the mid 1990s of the grave danger of the derivatives market causing a systemic collapse of the financial and real sectors resulting in international financial instability. Small good that did the world!]