The slow road to recovery

The Federal Reserve has slashed interest rates and taken measures to improve liquidity in the short-term money markets and even taken over Fannie Mae and Freddie Mac.

The US government has also bought almost 80 per cent of AIG but these actions still failed to give investors confidence that American banks have revealed the full extent of losses associated with their appallingly bad lending in the US housing market.

So now it looks like the US government will be buying up to approximately US$700 billion worth of these bad loans, parking them in a special company, presumably foreclosing on people's properties at a far slower rate than commercial banks would do, and only slowly selling these discounted securities back into the marketplace.

The question now is whether these measures will convince investors it is safe again to lend to financial institutions in the United States and to a lesser degree the United Kingdom.

The answer eventually will be that yes investors have regained confidence but it could still be quite some time before the cost to banks of borrowing from investors heads down by any sizeable amount.

The sooner this happens the better whereas the longer it takes the greater will be the period in Northern Hemisphere economies when banks simply cannot undertake as much lending as they would normally do.

This means that we think it is valid to assume some downside risk still exists for the New Zealand economy over the coming 12 months as a result of relatively higher borrowing costs and downside risks to trading partner growth rates.

Thankfully though there are a good number of insulating forces in New Zealand which mean we think it is reasonable to say the worst for the recession has now passed.

As noted last week business and consumer confidence measures have improved strongly recently and while we think people are being a bit optimistic this will tend to translate into some backing away from laying-off people, slashing inventories, and delaying capital expenditure.

Perhaps it is worth clarifying one important point however.

Just because the worst for the economy's overall growth rate may have been and gone does not mean all sectors will soon be improving.

We retain a very bad outlook for residential construction as supported by recent news of major projects going into receivership.

Residential property developers have been hit extremely hard by finance company collapses and reduced pre-sales as buyers sit on their hands waiting for lower prices.

This means we are going to see further improved availability of trades people over the coming year along with continued problems for suppliers of building materials and retailers selling products normally going into new houses such as wallpaper, carpets, fridges and so on.

Just as a finishing note, my personal view is that the outlook for the New Zealand economy now is the best it has been in many decades and the amazing news this week that the United States has agreed to talks on a free-trade agreement with New Zealand and three other nations adds to that view.

Even with plans, economic recovery to take time

Even if numerous proposals in the works - such as the historic bailout sent to Congress yesterday - are enacted right away, experts interviewed for this story said long-term solutions may be difficult to implement and may not really do the trick, in large part because today's economic and financial turmoil is rooted in a widespread credit availability crisis and billions of dollars in home mortgage losses. Without credit - lending done between businesses and consumers and their banks and between the banks themselves - strong economic growth is harder to spur.
The credit crunch, combined with the extent of the troubles in the housing and mortgage market, makes these times unique, according to academic experts and economists.

Housing and credit problems could lead to tough times even after the downward spiral bottoms out, the experts said. Instead of a rebound that leads to extensive economic and job growth - as was seen after the recession of the 1990s - economists said, it's possible the economy could go through an extended period of stagnation, where no one is losing ground - but no one is gaining ground either.

Bernstein, an economist with the Economic Policy Institute, a left-leaning Washington, D.C., think tank. "It's not going to be easy."
Congressional staffers began meeting yesterday on the Bush proposal for a massive bailout - which would give the Treasury Department sweeping powers to buy and then sell up to $700 billion in mortgage debt, and could increase the national debt to as much as $11.3 trillion.
Even with all of the solutions discussed in the past week, and the Bush administration's plans unveiled yesterday, many experts think what the economy and financial systems need is simple - but yet incredibly discouraging and worrisome to investors, consumers and business owners alike: time.Making that more complicated, Malanga noted, is the host of unknowns that remain and the potential for unpredictable events that could make an uncertain environment worse.

Continued turmoil could mean that, even with potential solutions in place, a strong bounce-back may not ensue quickly.

Crunch to increase debt recovery outsourcing

More companies are expected to outsource some consumer debt management and recovery operations, even though the credit crunch hasn’t impacted the industry so far, research has revealed.
More than a quarter of respondents (26 per cent) to a survey sponsored by outsourcer Firstsource said they had not been affected by the declining economic environment.debt managers do expect to outsource to specialist collections and recovery agencies to increase their collections levels, reduce defaults, and lower their costs.

• 27 per cent of respondents said some consumers are delaying payment of bills by up to three months, and 22 per cent of debt managers reported they had increased their write offs of customer debt in the last 12 months.

1. 68 per cent of debt managers said they planned to increase their use of outsourcing within the next year and 27 per cent said they would outsource more within the UK

2. 18 per cent reported they would collect more from offshore, and 23 per cent expect to outsource more both within the UK and offshore.

Matthew Vallance, president of Firstsource, said: “Although most consumer debt managers report that they haven’t been rocked by the credit crisis, the trend amongst consumers is towards later payments which will consequently affect cash flow. “Debt managers are looking to debt collections and recovery outsourcers in the UK and offshore that have the resources to collect more debt.