Opinion: Why a global recession is now likely

By BNZ Currency Strategist Danica Hampton The NZD/USD spent most of Friday night consolidating within a 0.5850-0.5925 range. Friday's US economic data was terrible. Non-farm payrolls fell 240,000 in October (and September's job losses were downwardly revised to 284,000) and the unemployment rate climbed to a 14-year high of 6.5%. While the data sparked fears about a US, and global, recession US equity markets bounced and this helped limit the fall-out in currency markets. The S&P500 finished Friday up 2.89% (although down 3.9% for the week). Over the weekend, China approved a US$586b spending plan to bolster growth and announced a shift to "moderately easy" monetary policy. Hopes a rebound in Chinese growth will help pull the global economy out of recession has helped underpin growth sensitive currencies like NZD. After closing last week around 0.5910, solid demand for NZD/JPY has seen NZD/USD has climb above 0.5975 this morning. The outlook for global growth remains the biggest driver of the NZD/USD. We've had some positive news - in the form of aggressive global rate cuts and various bank bail-out and fiscal packages. But there is still plenty to worry about. While the fiscal packages and interest rate cuts are encouraging, we don't think these efforts will prevent a global recession.

This week's Eurozone GDP will likely confirm the region is in recession and the BoE's Inflation Report will likely slash its UK GDP growth forecasts dramatically. While uncertainty about the global outlook persists, expect the NZD/USD to continue trading choppily within familiar ranges taking its cues from fluctuations in global equity markets. Locally, we will soon have a new Prime Minister following National's election victory at the weekend, but this doesn't change the fact NZ is in recession. Today's QV Valuation release showed that residential property prices fell 1% in October, taking the annual decline to 6.8%. This week's economic data will likely continue to portray a struggling NZ economy. Thursday's NZ-BNZ PMI will likely remain ensconced in sub-50 contractionary territory and Friday's Q3 retail sales volumes are expected to contract for a third quarter. Over the coming week, we suspect the NZD/USD will find headwinds towards 0.6050, but couldn't completely rule out a push up towards 0.6150-0.6200 if we saw a significant improvement in global equities and risk appetite. On the downside, initial support is seen around 0.5790-0.5800. Markets were hit by terrible US economic news on Friday, but surprisingly US equities bounced and the USD managed to edge higher. Friday's US employment report painted a bleak picture. Not only did the number of jobs fall 240,000 in October (vs. 200,000 forecast), but September's payrolls was downwardly revised (to -284,000 from -159,000). This was the tenth consecutive month of job losses and brought the toll of jobs lost to 1.2m for the year. The unemployment rate climbed to 6.5% (well above 6.3% forecast) "“ its highest level in 14 years. Highlighting the impact of the economic downturn on the auto industry, General Motors and Ford both posted worse than expected quarterly losses. GM also warned that liquidity would fall short in the first half of next year if it could secure new funding. Regardless, the S&P500 managed to climb 2.89% on Friday. It was an extremely volatile week for US stocks - the huge one-day rally after Obama's victory, was quickly followed up by the worst 2-day fall since 1987 "“ and the S&P500 finished the week down 3.9%. Despite the slew of awful US news released on Friday night, currencies were relatively stable. Early on EUR/USD was squeezed up to around 1.2850 by demand from Asian sovereign accounts, but worries about the health of the US economy and a global recession saw EUR/USD dribble lower as the week drew to a close. The ECB's Smaghi warned that structural differences between Europe and the US meant the ECB couldn't ease rates as aggressively as the Fed. Over the weekend, China approved a US$586b spending plan to bolster growth and announced a shift to "moderately easy" monetary policy. This has helped mitigate some of the global recession fears and provided a bit of a prop for growth sensitive currencies and JPY crosses first thing this morning. While markets are starting to respond to the worldwide policy efforts to shore up the financial sector, and the recent string of interest rate cuts are encouraging, these efforts will not prevent a global recession. And this week's economic data will likely highlight fears about slowing growth. Friday's Eurozone GDP reading for Q3 is expected to contract 0.1%q/q confirming the region is in recession. In the UK, the main focus will be the BoE's Inflation Report (Wednesday). Given last week's 150bps rate cut, we expect the BoE has taken a razor to its GDP forecasts and probably has growth falling to at least 1% next year. In the near-term, expect currencies to continue taking their cues from global equity markets. However, lingering fears about a global recession will likely provide some support for USD ensuring bounces in EUR/USD and GBP/USD are limited. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.