Businesses will often plough on through a recession on retained earnings, family resources or bank debt. But that can only go on so long before more drastic measures become inevitable. We're seeing some of this now - the echoes of the depths of recession just as the economy officially starts growing again.
Mortgagee sales reached a record in September, according to Terralink and higher than average foreclosures are expected through 2010. While not as severe as first feared, unemployment may still peak above 7% next year. Meanwhile, household debt is currently running at an average 152% of income and Reserve Bank Governor Alan Bollard is warning risks to economic recovery remain. That's all a recipe for a fairly tepid recovery, although still perhaps strong enough to justify interest rate increases as early as March or April next year.
One of the drivers for New Zealand's recovery is as simple as Kiwis staying home, or coming back as offshore opportunities offshore recede. Annual net migration rose to a five-year high in the 12 months to October, mainly driven by an 18% drop in departures. That's an additional 18,500 people who need somewhere to live, a bed, a fridge, a flat-screen TV, maybe a car.
Perhaps more significantly, the stock market is beginning to show signs of renewed vigour. Private companies are returning to the bourse, detecting there's sufficient appetite for shares to make new share offerings viable. These aren't the desperate, deeply discounted balance sheet-strengthening exercises in evidence early this year. Companies including milk processor Synlait want equity funding to grow their business. Outdoor equipment chain Kathmandu found enough buyers at its Initial Public Offering for its private equity owners to exit the company. Even PGG Wrightson, which is selling shares at a discount, is assured of the funds it needs to repay its debt, with an underwritten rights issue. Other share sales are mooted.
Added to that, Fonterra has charted a strong rebound in global dairy prices, which will help fund its forecast higher payments to farmers and bolster the economic recovery. And it raised those forecasts despite the assumption of a kiwi dollar trading at 74 U.S. cents, a level that would have eroded any profit margin in a more tentative rebound in commodity markets.
For all these reasons, there's a growing conviction among economists that Bollard will start raising interest rates in the next four or five months, as long as he keeps seeing that the economy is rebounding. But he's not likely to herald his change of heart by banging a drum. The last thing he needs is a currency market pricing in higher rates too early, choking export returns. All this argues for Bollard to continue with his cautious rhetoric for now. But don't bet on him holding interest rates this low for too long.