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In March New Zealand Finance Minister Michael Cullen and the Bank of New Zealand forecast a possible recession.

Mr Cullen said he couldn’t rule out the possibility of a recession this year, while BNZ said the probability of two consecutive quarters of the economy going backwards - the classic definition of recession - was better than 50%, but it still expected economic growth of 1.4% for the year.

Mr Cullen said that any recession would be “shallow”; a “technical recession” he was quoted as saying. BNZ seemed to concur.

Almost two months later there’s a growing chance the predictions will turn out to be accurate.

With so much of the NZ economy dominated by Australian companies, there should be interest in what is happening across the Tasman in retailing (Woolworths and Harvey Norman), media (Fairfax and APN News), financial services (all four big banks), the likes of Coca Cola Amatil, car exporters and building products groups such as Boral, Fletcher and James Hardie.

A sharp drop in employment in the March quarter is the latest in a growing number of indicators signally a slowing economy across the Tasman.

Statistics New Zealand said yesterday that there was a fall of 29,000, or 1.3%, in seasonally adjusted employment in NZ in the March quarter to 2.14 million people.

(Australia added more than 25,000 jobs in April alone, to put that in some context.)

And over the year to the end of March, employment fell 5000, or 0.2%; Australia’s rose by around 2.9%, or close to 302,000.

In the wake of the jobs figures, NZ analysts now believe the chance of a cut in the country’s key interest rate, the Reserve Bank of NZ’s Official Cash Rate (OCR) could happen around September.

But others say next month could see a surprise trim if the spate of poor figures continues.

Releasing the figures, Statistics NZ said the fall in employment came after a period of increasing numbers since 1999; with the quarterly fall the largest in percentage terms in 19 years.

Despite the sharpness of the fall, the unemployment rate only rose to 3.6% from the December quarter’s 3.4%, which was the lowest since the present series for measuring NZ unemployment started in 1986.

The unemployment rate was kept down by a surge in people leaving the labour force, which fell a seasonally adjusted 24,000, or 1.1%. The participation rate fell to a three-year low of 67.7%.

Reserve Bank Governor Alan Bollard will have to rethink his position on inflation. Last month he said the strength in the labour market was a source of inflation and a reason for leaving the official cash rate at a record high of 8.25%.

No longer: the hardheads in the markets sold off the Kiwi dollar to a three month low yesterday on expectations of a rate cut sooner than later. It is starting too look overvalued and unsupportable at current levels for too much longer.

The idea of a slowdown severe enough to be called a recession isn’t too far fetched in NZ: last week house consents and sales figures surprised with the severity of their falls in March.

According to Statistics NZ, building consents fell by nearly a third in March compared to March 2007.

The official figures show that In March this year consents were authorised for 1567 new units, a decrease of 702 units or 31%, compared to a year ago.

Apartment consents fell from 190 in March 2007 to 50 last month and excluding apartments, 562 fewer new dwellings were authorised last month, a fall of 27% compared with March 2007.

Seasonally adjusted new dwelling authorisations fell 9.1% last month compared with February, continuing the easing trend that started last June as interest rates rose sharply to try and contain inflation.

For the year to the end of March Statistics NZ said the number of authorised new dwellings fell 4.9%, compared to the year to March 2007.

According to the NZ Real Estate Institute, house sales fell to a seven-year low in March.

Economic growth in NZ is expected to slow to 1.5% this year from just over 3%, according to market forecasters. Lower dairy exports and the impact of a drought will be major factors.

Exports rose 3.7% in March from March, 2007. That was the slowest growth for eight months and there’s a growing belief that the economy will slow more than forecast.

Certainly that’s a view expressed by Reserve Bank of New Zealand Governor, Alan Bollard last month.

But his certainty is now under pressure.

The export figures show first-quarter dairy export volumes declined, adding to signs that overall growth may have stalled in the March quarter. Dairying is the most important business in the country.

Business confidence slumped to a 33-year low in the first quarter, according to a survey by the New Zealand Institute of Economic Research and wage rises are slowing: less than 1% in the first quarter for non-government workers. Some 20% of firms in that NZIER survey said they may fire workers this quarter as costs rise and profits fall.

Slowing wage growth, falling house prices and rising unemployment is eroding consumer confidence, which was at a 10-year low in the first quarter.

Economists think gross domestic product increased just 0.1% in the March quarter. And if growth manages to hit 1.5% for the full year, it will be the slowest pace in a decade.

Retailing took the brunt of the jobs loss in the first quarter, and this week Briscoe Group, an Auckland-based sports goods and homeware retailer, said its first-half profit may fall 50% as spending slows.

Governor Bollard raised the OCR four times between March and July 2007 and his statement last month forecast inflation to remain higher than his 1%-to-3% target all this year.

The US recession, drought and surging oil and grain prices are not making it any easier for him to lower interest rates, even though the signs of a slowing economy are increasing.

Consumer Price Inflation rose at an annual rate of 3.4% in the March quarter. It’s the sort of dilemma central banks in Japan, Europe, the UK and the US find themselves in.

That’s why the comments in the RBNZ’s latest financial stability report bear studying.

In the report Mr Bollard was at pains to point out a raft of risks to the system and economy.

He also announced some special measures to boost liquidity in case the global credit malaise deeply infects New Zealand.

The risks mentioned by the Reserve Bank included the overvalued housing market, stretched household balance sheets and upward pressure on funding costs. (A direct flow on from the credit crunch and something being experienced in Australia: in fact these concerns mirror Australia.)

The profitability and cashflows of NZ business are a concern for the bank which warned commercial and industrial property prices would probably fall.

The ongoing problems among finance companies will continue: around 18 have run into problems or failed in the past two years.

Banks have been told to diversify funding sources, lengthen the maturity structure of their debt and improve assessments of exposure to economic slowdown.

On top of all this, the global economy remains a risk.

Goldman Sachs JBWere economist Shamubeel Eaqub said this week the “housing implosion” could see the economy could fall of a cliff because households were so in debt and that had been backed by house prices. And that could happen as the financial system faced heavy strains due to the global credit crunch.

To help relieve pressure in the markets from rising funding costs and the credit crunch, the RBNZ has started accepting AA rated bonds issued by government agencies and AAA rated mortgage-backed bonds.

Mr Bollard said these and other measures are designed “to ensure adequate liquidity for New Zealand financial institutions in the event that global market disruptions were to intensify”.

The RBNZ highlighted the strains the NZ housing market is under.

It said house sales fell 53% in March from a year earlier, mortgage approvals are falling as banks tighten their lending criteria and house prices are dropping.

Household debt was about 2.6 times disposable income at March 31 and mortgage payments make up 12% of income.

“Pressure on household finance highlights the importance of banks and other institutions making adequate preparations for a rise in loan arrears,” Mr Bollard said.

That’s a state of affairs not unknown here, but New Zealand is far more advanced in its slowdown.

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