Economy contracts more than expected; kiwi dollar drops

Friday 26th June 2009

New Zealand’s economic recession unexpectedly deepened in the first quarter, reflecting weaker household spending and a slump in manufacturing, stoking expectations the economy faces a slow and tepid recover from the worst slump in 30 years.

The kiwi dollar dropped after the report. Gross domestic product shrank 1% in the three months ended March 31 while fourth-quarter GDP was revised down to 1% from a previously reported 0.9%, according to Statistics New Zealand. A contraction of 0.7% was forecast, according to a Reuters survey. Against the same quarter a year earlier, the economy shrank 2.7%.

The contraction in first-quarter GDP matched the forecast of the Reserve Bank, which last month kept the official cash rate unchanged at a record low 2.5% and said rates will stay low through the second half of 2010.

The jobless rate is currently at a six-year high of 5% and predicted to worsen through this year as companies trim costs to meet flagging demand.

The GDP data “was about where the Reserve Bank was thinking – it probably doesn’t have a great deal of policy implications,” said Andrew Michl, who helps manage $4 billion in New Zealand cash and fixed interest at ING New Zealand.

“Since the end of March the world has maybe stabilized, and governments and regulators haven’t done a bad job,” he said. Still, there are challenges ahead with second-round effects of recession such as the rising jobless rate

The New Zealand dollar fell to 64.20 US cents from 64.64 cents immediately before the numbers were released. Three-month bank bills fell 1 basis point to 2.84%.

The NZX 50 Index pared its gains after the data, slipping to 2776.59, from 2787 immediately before the figures, and is up 0.2% on the day.

Reserve Bank Governor Alan Bollard last month predicted the economy will climb out of its slump in the fourth quarter and the OECD this week forecast growth of 0.6% in 2010 after a 2.9% contraction this year. Still, it forecast the jobless rate may exceed 8% in 2010.

“The world was a hostile environment for growth” in the first quarter, said Bernard Doyle, New Zealand strategist at Goldman Sachs JBWere. “We expect one more quarter of negative growth (a 0.4% contraction in the current quarter), with residential construction likely to be a significant drag.

However we remain of the view that modest sequential growth will return to the economy” in the second half, he said.

Household spending, which makes up almost two thirds of the economy, fell 1.4% in the first quarter, the biggest decline since the June 1991 quarter as reduced job security and waning property values deterred New Zealanders from opening their wallets. Spending on home appliances, cars and furniture declined 2.5%.

Christchurch-based retailer Smiths City Group yesterday reported annual profit tumbled 72% to $1 million. Chairman Craig Boyce said the company’s three market segments, big ticket retail, customer financing and property market had all “been adversely affected by market factors.”

Manufacturing activity fell 7.2%, led by a 16% slump in makers of metal products and a 12% decline in equipment making. Business investment dropped 7.3%, while total investment fell 6.1%.

Exports of goods and services rose 0.6% in the first quarter, rebounding from a 3.1% slide in the fourth quarter of 2008, led by a 12% increase in shipments of dairy products. Import volumes dropped 8.6%.

The GDP deflator, a broad measure of the overall price change for final goods and services purchased in New Zealand, rose 2.6 percent in the year ended March 31.

Businesswire.co.nz

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