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Slump in death throes says BNZ

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  • Slump in death throes says BNZ

    Slump in death throes says BNZ

    By JAMES WEIR - The Dominion Post Last updated 05:00 27/07/2009
    The housing market may drive the first stages of economic expansion after an 18-month-long recession that may be all but over, according to bank economists.
    But expect lower economic growth as the norm in future, even though the recession is "in its death throes", Bank of New Zealand economists say.
    On Thursday, the Reserve Bank is expected to leave official interest rates unchanged at 2.5 per cent given an improving global outlook and an expected recovery in New Zealand. Most economists expected official interest rates to stay low till late next year.
    The big picture is for house building and migration to pick up, but exports and tourism face the headwinds of a high dollar, undermining the potential economic pickup.
    The central bank believed the kiwi would fall, but it was not expected to cut rates further to try to spark a drop, economists said.
    In its latest economic report, BNZ says the housing market may drive the first stages of economic expansion.
    Housing has fallen enough to spark a "significant bounce" in activity in the next 12 months, BNZ says. But that will come through a rise in house building, not another house-price boom.
    If house prices did take off again, it would be a "bad sign" for the economy, suggesting few had learnt the lessons of the past.
    The leading indicator for housing is sales turnover, which slumped by two-thirds to about 4000 in May. Sales have since improved to more than 6000 a month. That is still about half peak levels, but the demand for housing is buoyed by rising net migration, which could reach 30,000 over the next year, BNZ says.
    At the same time, house-building approvals are down to record lows, suggesting not enough homes are being built to meet demand.
    House building should also get a boost because the cost of debt is falling and shorter-term interest rates are expected to stay low until late next year.
    Household spending usually follows house building. Retail spending should start to creep up late this year, supported by tax cuts and net migration, BNZ says.
    That will be offset by the impact of unemployment rising to just under 8 per cent and higher savings rates.
    But most economists do not expect official interest rates to go any lower.
    On Thursday, the Reserve Bank is expected to drop the previous statement that the cash rate could move modestly lower, say Westpac economists, because the risks to the economy are getting smaller.
    On the other hand, there is no urgency to raise interest rates any time soon.
    Rates need to stay low to support the economy through a weak period and inflation is under control, Westpac says.
    Bank of New Zealand says in a technical sense, the present recession is near its "death knell".
    The vast majority of indicators suggested the economy would improve either late this year or early next.
    Business and consumer confidence have jumped from low levels and they have been a good leading indicator of economic growth in the past, BNZ says.
    For some time, forecasts have said there was no hope of a global recovery until the United States and British housing markets steadied. "The evidence is now there," BNZ says.
    At the end of last week, figures showed the US housing market had begun to recover. Home sales rose for the third month. Annual sales are almost at 4.9 million. Mortgagee sales are declining, from half of all sales early this year, to about a third of sales in June.
    -The Reserve Bank is expected to hold the official cash rate at 2.5 per cent on Thursday.
    - Rates to stay low till late 2010 because of a still weak economy Inflation is muted.
    - Rates unlikely to fall any further.
    - No need to raise rates soon.
    The housing market may drive the first stages of economic expansion, according to bank economists.
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx