The chilling winds of global recession will push thousands of people out of work and more than double the length of the dole queue over the next two years, Treasury predicted today.
The economic update released as part of the budget shows Treasury's gloomiest predictions last year were optimistic and the pain will continue to flow through for years to come.
Before the last election Treasury forecast that New Zealand would suffer nine months of negative growth starting from early 2008. Now it believes the economy will endure 21 months of shrinkage with only weak growth starting at the end of this year.
The human cost will be high with the unemployment rate probably peaking at 8 percent in late 2010.
The Social Development Ministry predicted the 41,000 people currently on the dole will increase to 80,000 in 2010 and peak at around 90,000 in 2011.
It was estimated that the Government would have to spend $2.5 billion more on benefits over the next four years than Treasury forecast just in December.
Unemployment rates last topped 8 percent in the early 1990s.
Treasury said the world economy was experiencing the deepest decline since World War 2 and there was great uncertainty about how bad it could get.
The main forecast assumed some growth would begin to flow through in the 2009 December quarter, but Treasury warned if New Zealand's trading partners showed ongoing weaker growth, New Zealand's economy could continue to decline through 2010 and push unemployment up to 10 percent.
"Higher unemployment would lead to more mortgagee sales and lower demand for houses with housing prices falling further than in the main forecast," Treasury said.
Under the mid-range forecast house prices would fall by 20.4 percent in real terms from their peak in 2007.
Those who keep their houses and jobs will find some brighter spots in the economic update with Treasury picking that the Reserve Bank will keep the official cash rate down around 2.5 percent until 2011 which will result in lower mortgage payments.
These lower rates would "play an important role in promoting a gradual recovery in economic growth".
The other factor that would drive New Zealand's economy back into positive territory would be growth returning to major trading partners boosting exporters fortunes.
Though once again Treasury said the future had never been more uncertain as there were no similar past conditions to compare with the current economic storm.
The effect of stimulus packages around the world was uncertain and no one knew how long the disruption in the financial markets would continue and what this would mean for the real economy.
"Many governments find themselves in uncharted waters", Treasury said.
Finance Minister Bill English said the New Zealand economy had been driven by years of cheap and easy credit, "the world has called an end to that game."
