The reason is primarily that when we talk about recession in New Zealand we are usually talking about the domestic part of our economy finally joining in with the weakness already seen in exports. The way our economic cycle runs is that things start chugging along with an upturn, this leads to a rise in inflationary pressures, interest rates rise, the exchange rate rises, and that causes growth in our export sector to slow down and perhaps go backwards. While the currency is at high levels householders are generally spending up large, house prices are rising, and the Reserve Bank has to keep raising interest rates to try and get inflationary pressures out of the domestic sector. 

Eventually the domestic sector does slow down and this allows the Reserve Bank to cut interest rates which will encourage the exchange rate to decline with extra assistance as investors here and overseas see reduced profit opportunities in the New Zealand economy so take their money elsewhere.

We know that for the past four years the Reserve Bank has been trying very hard to cap our housing market and get householders to rein in their willingness to borrow and spend up large. All the evidence suggests this finally started to happen in the June quarter last year when fixed housing rates went above 8.5%. Now, with help from a few other factors such as the global liquidity crisis hitting confidence and pushing those fixed interest rates generally above 9.5% the housing market is finally going backwards.  At the same time, with migration numbers ebbing away consumers are cutting back on their spending with the volume of retail spending growth now running at about 0%.

What the Reserve Bank has been aiming for is now being achieved and on the face of it you would think they would be easing monetary policy now.  However what is staying their hand is the extra inflation coming from things like the anticipated easing of fiscal policy, the carbon emissions trading scheme, a still very tight labour market, and sharply rising international food and energy prices.

We expect to see interest rates falling potentially quite rapidly from late this year through all of 2009 and it is likely that before that starts the Kiwi dollar will be heading southward. In other words, conditions for New Zealand’s export sector generally are set to improve on a strong cyclical basis from sometime late this year. 

How long might the better times run? Actually we haven’t even attempted to answer this question in any other article or forum before but let’s have a go.  The New Zealand dollar sat at below average levels for four years from 1991-94, sat above average the next three years, was below average for over four years between 1999 and the middle of 2003, and has been above average almost five years now. Maybe this means you can anticipate a more favourable currency for four years starting in 2009. High commodity prices make us cautious about this however.

Once we get the drought out of the way, the currency drops about ten cents from current levels, and the Reserve Bank starts delivering interest rate relief we expect to see a fresh resurgence in New Zealand’s farming sector on top of what is already happening in non-drought dairy areas and dairy conversion regions. Even the sheep and beef sector will eventually join in the goodness.