While the financial press concentrates on forthcoming recessions in the major economies, some smaller ones are already shrinking, or about to contract. What they have in common is a property boom that has turned to bust, reducing growth by hitting construction and undermining consumption as falling house prices make people feel less wealthy.
Take Spain. House prices tripled between 1997 and last year and investment in housing accounted for 10% of GDP in 2006, twice the eurozone average. Construction financing became ever-more expensive following eurozone rate hikes and tighter credit last summer, and home sales and prices have since slid.
The rot has spread as eurozone interest rates have remained high, with rising unemployment – along with inflation – causing a slump in retail sales. “There’s a high likelihood” that Spain could be in recession by the end of the year, said one analyst. First-quarter growth was just 0.3%.
The end of Ireland’s boom
In Ireland, which had a similar house-price boom, a “property-led” downturn is also spreading, as Capital Econmoics noted. First-quarter growth shrank by 0.2% as construction slumped by 9% from the previous quarter. Unemployment has edged up to 4.8% and slumping consumer confidence bodes ill for spending.
In New Zealand, “the old drivers of growth”, easy access to credit and increasing housing wealth, “have dissipated”, said Commonwealth Bank’s Chris Tennant-Brown. Growth contracted by 0.3% quarter-on-quarter between January and March and is set to shrink further in the second quarter, fulfilling the technical definition of a recession.
Denmark, where house prices more than doubled before peaking, is already there – with negative growth late last year and early this year. It’s the first European country in official recession. As Gilles Moec of Bank of America put it on Reuters.com, “who sinned by housing is punished by housing”.