Economic recovery may have slowed

Monday 21st June 2010

New Zealand’s economic recovery may have slowed last quarter, reflecting the impact of drought on dairy output and ongoing weakness in the housing market, though the drop in pace probably won’t deter the central bank from raising interest rates again.

Gross domestic product expanded 0.5% in the first three months of the year, slowing from a 0.8% pace in the fourth quarter of 2009, according to a Reuters survey. Forecasts ranged from 0.2% to 0.8%. Year-on-year growth sped to 1.8% from 0.4% three months earlier.

Economists are less bullish about the track of growth than the central bank, which most recently predicted a 0.8% expansion in the first quarter, having raised the official cash rate for the first time in three years while signalling more to come. Households have been repaying debt and saving rather than spending and farmers, buoyed by strong export prices for dairy products, are expected to pay down debt as returns rise.

“The economic recovery is well underway and continues to gain traction,” said Nick Tuffley, chief economist at ASB, in a note. “While there may be a few pockets of weakness in Q1 activity, overall we expect to see a continued broadening” in the recovery.

The economy probably rounded out its fourth quarter of expansion, having emerged from recession last year. Consumer spending, which makes up almost two thirds of the economy, has lagged expectations, though, and the housing market, which gave households a heightened sense of buying power during the boom, remains flat.

“The pace of economic growth wobbled a bit in the first quarter of 2010, but the recovery remains on track,” said Brendan O’Donovan, chief economist at Westpac Banking Corp. “The recovery has been distinctly export led, thanks to sky-rocketing commodity prices and strong demand from Australia.”

Figures this month showed the terms of trade jumped 5.9% in the first quarter, the biggest increase since the first quarter of 1976, with prices of dairy products surging 32% as the kiwi dollar weakened, ensuring overseas revenue came home at a ‘decent’ exchange rate.

Bollard kicked off his tightening cycle by raising the official cash rate a quarter point to 2.75%. He will keep on with increases until the OCR reaches 5%, ANZ chief economist Cameron Bagrie said this month.

Traders are predicting there’s 1.39 percentage points of increases pending over the next 12 months, based on the Overnight Index Swap curve.

Westpac’s O’Donovan says the range of forecasts for first-quarter GDP is wider than usual because the exact value of new mining projects isn’t yet known and they have potential to “throw the GDP figures around substantially.”

Projects that came into production include the Kupe oil and gas field. By contrast, manufacturing activity probably showed zero growth in the first quarter, as dry weather sapped agricultural output and electricity, O’Donovan said. The finance and business sectors also probably posted a weak result.

Economists will also be looking for any signs of a consumer upswing. Unemployment unexpectedly tumbled to 6% in the first quarter from 7.1% and companies are showing more willingness to take on workers, helping stoke sentiment among consumers.

Kiwis increased spending on debit and credit cards at retailers for a fourth straight month in May, with the value of transactions rising 0.4%.

The GDP data comes in a bumper weak for economic figures.

The Balance of Payments is due out on Wednesday and is expected to show the current account gap shrank to an annual $5.07 billion in the first quarter from $5.5 billion, according to a Reuters survey. For the quarter, the deficit shrank to just$270 million from $3.6 billion and fell to 2.7% as a percentage of GDP, from 2.9%.

Merchandise trade probably recorded a surplus of $870 million in May, up from $656 million a month earlier, a separate survey showed.

Rising commodity prices coincided with the traditional seasonal peak in shipments of agricultural products to drive the surplus higher, said Philip Borkin, economist at Goldman Sachs JBWere.

Businesswire.co.nz

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