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Weak growth should keep interest rate hikes off the table until 2012

Thursday 22nd September 2011

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A slower than expected pace of economic growth in the second quarter will probably stay Reserve Bank Governor Alan Bollard’s hand on interest rates until next year.

Gross domestic product grew 0.1% in the three months ended June 30, according to Statistics New Zealand, short of a Reuters survey of economists picking a 0.5% pace of growth and 0.6% forecast by the Reserve Bank.

Statistics NZ revised first quarter growth up 0.1 percentage points to 0.9%. The economy grew an annual 1.5% to $135.9 billion. While disappointing in the latest quarter, “averaging through the volatility, the economy recorded respectable growth of around 0.5% per quarter,” said ASB economist Jane Turner.

“This is still a robust performance, given the disruption caused by earthquakes in February and June.

“Given widely-held expectations that GDP will be materially stronger in the second half of 2011, we don’t believe the outcome will materially affect the RBNZ’s view of NZ’s recovery.”

Westpac economists said they were regarding the June quarter result “as a pothole rather than a renewed broad-based economic slowdown”, which would reduce pressure to raise interest rates.

Markets are pricing in 33 basis points of rates over the coming 12 months, according to the Overnight Index Swap curve, as the tepid second quarter growth erodes the prospect of underlying inflation. That pushed the New Zealand dollar below 80 U.S. cents for the first time since May 25, and the currency recently traded at 79.78 cents.

“The pace of growth is not going to cause any problems; it’s not going to lead to a sharp lift in unemployment or rampant inflation,” said Deutsche Bank NZ chief economist Darren Gibbs.

“Clearly there’s no need to raise interest rates.”

Bloomberg reports that Bollard today told a business audience in New York he is in no hurry to hike interest rates due to the ongoing turmoil in global financial markets. He kept the official cash rate at a record low 2.5% last week, and indicated any increases would be “over the coming a year or so.”

UBS economist Robin Clements said “the global situation is still the risk” to any future rate hikes, though he’s still leaning towards an increase this year.

“The domestic economy is still plodding along, and unless we’re slammed by the rest of the world, we’re going to step up in the second half,” he said.

Finance Minister Bill English said the country’s economic recovery was patchy across different sectors, and is “performing relatively well on the back of strong export commodity prices, stabilising household debt and rising business and consumer confidence.”

The construction sector continued to weigh on the economy, shrinking 4.3% to $1.1 billion in the quarter, with the value of building work put in place falling to a decade low amid a lack of new housing. That’s set to reverse when the rebuild of Christchurch kicks in, though that has suffered several delays amid confusion as to whether insurers will re-enter the market.

Deutsche Bank’s Gibbs said construction has been held back by the housing sector’s weakness since the global financial crisis.

Mining shrank 5.4%, recording its fourth consecutive quarterly decline on weak oil and gas extraction.

Fishing, forestry and mining as a whole contracted 3.8% to $809 million.

Manufacturing, which underpinned growth in the previous two quarter, shrank 0.1% to $4.12 billion, led by declines in machinery and equipment manufacturing, and wood and paper products.

Service industries grew 0.5% to $24.4 billion in the quarter, led by gains in finance, insurance and business services, which expanded 1.5%, its fastest growth since March 2005.

Agriculture grew 4.3% to $1.81 billion on increases in dairy and livestock production, as New Zealand producers continued to benefit from record high commodity prices.

Household consumption expenditure rose 0.3% in the quarter, with increased spending on durable goods, such as furniture and major appliances.

General government final consumption fell 0.1% in the June quarter, led by 0.8% decline in central government administration. The government is looking to shave an annual $1 billion from the public sector’s retirement plans and general operations.

Gross fixed capital formation, which measures investment in fixed assets, shrank 0.4% in the period, following a 1.3% decline in the first three months of the year. That was based on tepid investment in residential housing.

Total inventories were built up by $126 million in the quarter, following a $101 million run-down in the March period. That was driven by the New Zealand Defence Force buying aircraft parts for its Orion upgrade.


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