NZ recession to be confirmed

Monday 22nd September 2008

Government figures this week will confirm the economy has tipped into recession, driven by a slump in construction, farm output and retail spending, heralding more interest rate cuts.

The economy shrank 0.5% in the second quarter, according to the consensus of economists' forecasts, adding to its 0.3% shrinkage in the first quarter. The first recession since 1998 probably extended into the third quarter, ASB chief economist Nick Tuffley says.

New Zealand's economy has been whacked with simultaneous punches this year. A drought during last summer sapped agricultural production, the price of oil, food and credit surged while demand in the housing market slumped. The second-quarter contraction may exceed the central bank's 0.2% forecast, boosting the prospects for another 50 basis point cut in the official cash rate.

"The RBNZ will stay focused on bringing borrowing costs down and recent international financial market turbulence is likely to present additional challenges," Tuffley said in a report. "We expect another 50 basis points cut in October, with the risk of another 50bp cut in December rising."

The benchmark NZX 50 Index has declined 21% this year amid prospects for dwindling earnings growth. Telecom, the biggest stock on the index by a whisker from Contact Energy, has fallen about 38%. Warehouse Group, the biggest retailer on the exchange, has tumbled 45%. Fletcher Building has dropped 39%.

Westpac chief economist Brendan O'Donovan predicts construction will be the biggest negative on second-quarter GDP, followed by agriculture and retailing. He tips eight of 11 components of GDP shrank printed negative in the latest three month period.

"Confirmation of recession could encourage the market to price in further monetary easing, especially if international financial conditions continue to deteriorate," he said.

Also out this week, figures showing how much New Zealanders were spending on their credit and debit cards in August. Goldman Sachs JBWere economist Shamubeel Eaqub forecasts growth in card spending stalled last month and said "the overall trend is likely to remain subdued for some months."

The Westpac McDermott Miller consumer confidence survey for the third quarter is released tomorrow, which will show whether two interest rate cuts since July have helped lift sentiment.

By Jonathan Underhill

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