The dreaded word ‘‘recession'' echoed around the world yesterday but experts in New Zealand are divided on whether the United States' financial crisis will send the New Zealand economy into a slump.
One forecasting agency, Berl, says the recession talk is premature grandstanding.
The agency is today warning of the dangers of dire predictions, pointing out that several predicted downturns over the past four years have not happened.
‘‘We now see an inglorious rush to be the first to confirm that the New Zealand economy is now in recession,'' Berl economist Ganesh Nana said.
‘‘We are not part of that rush.''
But BNZ economists believe a contraction is not only on the cards, but that the country may already be in it.
That view gained some weight yesterday when Finance Minister Michael Cullen would not rule out a technical recession - two consecutive quarters of negative economic growth - because of concerns about a drought, the weakening housing market and international financial turmoil.
Concern is now growing about what effect events in the United States might have on New Zealand's economy, as a wave of negative sentiment spreads around world markets.
The US Federal Reserve was expected overnight to make a dramatic cut to its interest rates, perhaps by as much as a full percentage point in an urgent effort to turn around the faltering US economy.
International concern has also been fed this week by a fire sale of US bank Bear Stearns, which experienced fallout from exposure to a sharp decline in the US housing market.
This is the same decline that has made it more expensive for New Zealand's banks to borrow money from overseas lenders.
That has resulted in local mortgage rates rising despite Reserve Bank Governor Alan Bollard not adjusting the official cash rate.
Yesterday, Nobel Prize-winning economist and former World Bank chief Joseph Stiglitz - in Auckland to speak at a seminar - predicted the US crisis would get much worse.
He also criticised the Reserve Bank of New Zealand for focusing on curbing inflation, saying this was ‘‘exactly the wrong mandate'' for a small open economy.
But while there is no doubt the US economy is struggling, there is a variety of views on how New Zealand might navigate the turbulence.
A feeling is developing that if there is a recession, it is likely to be small - something Dr Cullen was keen to emphasise yesterday.
‘‘A recession is two successive quarters of negative growth - it could be minus 0.1 and minus 0.1,'' he said.
‘‘I think that when people hear the word, they think of depression and something long, sustained and with large increases in unemployment.
‘‘I don't see the prospect of that.''
New Zealand's strong job market is one reason the fallout from the US could be limited, and Berl says strong dairy prices and local oil exports are also underpinning the economy.
It is possible that personal tax cuts could also add some stimulation to the economy as Labour and National enter this year's election campaign.
In Parliament yesterday, National leader John Key pinned some of the responsibility for a potential recession on the Government, saying excessive spending had pushed up interest rates.
Mr Key described the international financial environment as ‘‘extremely fragile'' and called on the Government to rein in some of its spending in response.
‘‘New Zealand has to understand it's not immune from that, we are part of a global environment,'' Mr Key said.
‘‘I think its irrelevant what term you want to put on the economic slowdown. What we do know is that our economy is exposed . . . and that's something the New Zealand Government should be responding to.''
Mr Key said he hoped predictions of a recession were wrong, but people struggling to pay mortgages, fill up their cars and put food on the table needed to know the Government was tightening its belt too.
Prime Minister Helen Clark responded by saying Labour would not do what a National-led government did when it hit economic ‘‘heavy weather'' in 1998 - cut New Zealand superannuation and sell a state asset.
The New Zealand sharemarket closed lower yesterday for its third consecutive session, but the losses were far smaller than on Monday and Friday when stocks plunged 2%.
Broker Kevin Rendell of Wellington firm Gould Steele and Co said sharemarkets around the world were in uncharted territory.
‘‘Probably, if anything, it's closer to the early '70s bear market that resulted from the oil shock, rather than what we saw in '87, the end of the tech boom, or even the Asian crisis in that it's a sustained fall . . . There were several false dawns in that bear market . . . It probably took 18 months to work its way through".
