Not a single one of us forecasters expected a year ago that we would probably be in recession in the first half of 2008 and even two months ago the chances of recession were more talked about in relation to the second half of this year rather than the first half. Why this sudden reversal of fortunes for the New Zealand economy?

Part of the weakness is simply the result of the three main factors which have been in play since early 2004. These are high interest rates, a high exchange rate, and below average net migration inflows.

But then from the middle of last year the global liquidity crisis broke out and this has led to extra upward pressure on interest rates in New Zealand, extra weakness in growth in our trading partners, and a tightening up of lending standards both here and overseas. 

We have also seen over a 6% increase in food prices in the past year and a 35% rise in petrol prices. This has eaten into the money households have available for spending on discretionary items each week.

We have also seen household wealth decimated with sharemarkets falling by between 20 and 25% in the past year, collapsing finance companies, and more recently falling house prices. But perhaps the main thing causing the negative result in the March quarter was the farming sector shrinking by 5.6% as a result of last summer’s drought.

The lesson for all of us in 1998 was that the rural sector still matters tremendously for the New Zealand economy. Back then we had about 1 1/2 years of drought which pushed the economy into recession and this time around even though the drought lasted for a short  period of time it has acted as a tipping factor in many parts of the country.

Drought has also led to electricity being produced through more costly means and some large industrial plants have reduced output to save electricity.

For many businesses there is probably worse to come in the very short term. But at least when it comes to the farming sector the outlook from here is generally good although one should continue to budget for further increases in the costs of items such as fencing wire, diesel, fertiliser and so on.

Farm returns will improve over the coming two to three years as the Kiwi dollar heads lower and we remain of the view that the global search for protein will lead to far better prices for sheepmeat and beef in coming years.

For lifestyle block owners one thing to think about is what the continuing increase in petrol prices may do to the desirability of our blocks of land.  With transport costs increasing the number of people likely to be willing to move out of the cities could decline in the next few years. 

In addition for the next couple of years lifestyle block prices are likely to be depressed by an oversupply of rural subdivisions around the country as a result of the property development boom that finance companies were involved in fostering.

But then again, if we really do get world-class broadband made available around the country and people increasingly start working from home the relative transport cost of shifting out of a city could start to look quite attractive. 

In addition growth in the regional economies due to the world’s surge in food demand will generate some interesting population shifts. But these trends are probably more relevant to a ten year horizon than a two year one.