New Zealand Faces Prolonged Recession as Exports, Tourism Slow

By Tracy Withers

Nov. 21 (Bloomberg) -- New Zealand faces the most prolonged recession in 18 years as a slowing world economy curbs exports, farm incomes and tourist arrivals, forcing companies to fire more workers, economists say.

Economic growth will likely slow to 0.4 percent in 2008 and 0.3 percent in 2009, Bank of New Zealand Ltd. said in a report published today. The economy shrank in the first two quarters of this year after expanding 3.2 percent in 2007. Two other forecasters say it will contract next year.

The International Monetary Fund predicts advanced economies including the U.S. and euro area will contract simultaneously next year for the first time since World War II, sending commodity prices lower and reducing demand for exports. Fonterra Cooperative Group Ltd., the world's biggest dairy exporter, today said its payments to New Zealand farmers will be 24 percent lower than last year.

``The slump in global growth that we are witnessing is astonishing,'' said Stephen Toplis, head of research at Wellington-based Bank of New Zealand. ``The immediate future is going to be nothing short of horrible.''

Toplis revised his 2009 growth forecast to 0.3 percent from 1.3 percent because of slowing business investment and exports. Overseas shipments make up 30 percent of the $130 billion economy, while the tourism industry makes up 10 percent.

Export prices, and in turn earnings, ``are under extreme pressure,'' he said. ``This will mean rural sector spending will soften.''

Fonterra Payout

Auckland-based Fonterra today said it expects to pay farmers NZ$6 a kilogram for milk solids in the year ending May 31. That's down from NZ$7.90 last year after the world price of butter, milk and cheese slumped 42 percent from a year earlier.

Demand is unlikely to recover by mid-2009, as previously expected, and rising stockpiles will prevent a quick recovery in prices, Chief Executive Officer Andrew Ferrier said in an e- mailed statement.

Fewer tourists are visiting New Zealand. Arrivals in October fell 3.3 percent from a year earlier, according to government figures published today. Visitors from the U.S. slumped 12 percent and tourists from Asia dropped 17 percent.

The number of tourists will fall more than 10 percent over the southern hemisphere summer, Tourism New Zealand said today.

Airline Job Cuts

Air New Zealand Ltd., the nation's biggest airline, this week said it will fire 200 workers, half of them cabin crew on its long-haul services, as it reduces capacity in response to falling demand for international travel.

New Zealand's jobless rate rose to a five-year high of 4.2 percent in the third quarter and may reach 7 percent late next year as hiring stalls, according to Darren Gibbs, chief economist at Deutsche Bank AG in Auckland.

``We expect that difficulties in the export sector will be reinforced by weakening domestic spending as firms respond to an extended period of sub-trend growth and tighter credit by cutting jobs,'' he said. Gibbs expects the economy will contract 1.3 percent in 2009.

Reserve Bank Governor Alan Bollard is likely to cut the benchmark interest rate by 1 percentage point to 5.5 percent next month, according to 10 of 13 economists surveyed by Bloomberg. Two, including Gibbs, expect a 1.5 percentage point reduction and one predicts three quarters of a percentage point.

Lenders including Westpac Banking Corp. and ASB Bank Ltd. this week lowered rates they offer home-owners and companies in anticipation of Bollard's move. The central bank has cut borrowing costs by 1.75 percentage points since July.

Tax Cuts

Lower credit costs will help Prime Minister John Key as he tries to steer the economy out of recession. Key was elected on Nov. 8 after promising income-tax cuts from April and more investment on roads and a high-speed Internet network to promote growth.

Still, the slowing economy means the government's budget deficit will be wider than forecast, limiting the scope for new spending, the Treasury Department said this week.

``The fiscal easing is money going directly toward stimulating the economy,'' said Toplis. ``Add on the interest- rate relief and you've got a massive hike in effective spending power. If you can survive what the first half of 2009 throws at you, then 2010 is shaping up well for happier times.''

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.