New Zealand economy in recession, bale-out talks stall, October rate cut likely: Economy roundup

It’s official – our friends over the ditch in New Zealand are in recession.

It’s official – our friends over the ditch in New Zealand are in recession.

This morning’s GDP data for the June quarter confirmed just how grim things have become in the shaky isles, where the economy contracted by 0.2% in the June quarter after a 0.3% contraction in the first quarters. For economists, two consecutive quarters of negative growth equals a technical recession.

The outlook isn’t good either, with JP Morgan’s chief economist Stephen Walters tipping another small contraction in GDP in the third quarter and a stagnant fourth quarter. “This will be a lost economic year for New Zealand, with GDP growth close to zero,” Walters said this morning.

His expects the Reserve Bank of New Zealand will cut rates by 0.5% in late October, following their 0.5% cut earlier this month.

Walters has also changed his forecast for Australia’s official interest rates and now expects the Reserve Bank of Australia will cut rates by 0.25% at its meeting on 7 October.

Walters argues that while inflation remains uncomfortably high, the turmoil on financial markets means that “easing too early is a mistake RBA officials now seem more willing to risk, rather than waiting too long before easing again and risking an even more abrupt slowdown in the economy”.

RBA officials are watching Wall Street carefully and would be getting increasingly worried about the prospects of US Treasury Secretary Henry Paulson’s $US700 million bailout package.

Negotiations on the rescue package were thrown into chaos overnight after Democrats learned that presidential candidate Senator John McCain is backing a new plan that differs markedly from one that has been under discussion.

A group of conservative House Republicans have proposed a mortgage insurance plan under which the US Government would offer insurance coverage for the roughly half of all mortgage-backed securities that it does not already insure.

The Republicans argue their plan would not hit taxpayers as hard as Paulson’s plan.

Whichever plan the US Government decides on, investors want to see some action sooner rather than later.

Uncertainty continues to weigh on the local market. After dropping 1.09% yesterday, the benchmark S&P/ASX200 index has increased by 0.5% this morning in subdued trade.