Q2 GDP may surprise with growth as recession's end debated

Monday 21st September 2009

The New Zealand economy contracted 0.1% in the second quarter, based on consensus forecasts, with some economists saying there’s a chance the recession ended.

Manufacturing and construction probably continued to print weak, while finance and insurance are expected to have rebounded, retail sales improved and exports likely contributed to an improvement in expenditure-based gross domestic product. Energy also probably contributed to an improvement as the Maari oil field came on stream and electricity demand rose.

“Q2 increasingly looks like being the trough in economic activity,” said Brendan O’Donovan, chief economist at Westpac. Still, “it will take time before any recovery generates significant inflationary pressure” allowing interest rates to remain low “for some time yet.”

Reserve Bank Governor Alan Bollard, who is predicting a 0.1% contraction in the second quarter following on from the first quarter’s 1% slump, sees inflation accelerating to 1.7% in the first half of 2010 – still comfortably within the bank’s target band.

Still, investors are betting on a steep period of tightening, with a Credit Suisse Group index based on overnight swaps pointing to 126 basis points of hikes to the official cash rate in the next 12 months.

“Economic activity is now starting to stabilise earlier than expected,” said Nick Tuffley, chief economist at ASB, which is forecasting second-quarter GDP growth of 0.1%. “As stronger-than-expected data have trickled out, the market has started to price in a relatively aggressive rate hike profile.”

Manufacturing shrank 2.8% in the second quarter, excluding meat and dairy, according to government figures this month and the BNZ Capital-Business NZ Performance of Manufacturing Index fell 0.9 points to 48.7 in August, extending the period of contraction to 16 months. That suggests manufacturing won’t quickly recover from the doldrums.

Still, business confidence continued to improve in August, with a net 34% of firms expecting general business conditions to improve in the next 12 months, up from a net 19% in July, according to the National Bank Business Outlook.

Residential construction soared to a 15-year high net, with all indicators bar commercial construction recording an improvement.

A sixth straight quarter of contraction would mark the worst recession since 1960, according to UBS New Zealand chief economist Robin Clements.

He predicts the second-quarter GDP data will show stabilisation in the economy, heralding “a return to low, positive growth” with the recovery continuing through 2010 while still “fragile and patchy.”

Businesswire.co.nz

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