NZ economy shrinks less than expected; recession confirmed

Friday 26th September 2008

New Zealand's economy shrank a less-than-expected 0.2% in the second quarter, confirming the nation's first recession since 1998.

The contraction, following a 0.3% dip in the first quarter, compared to expectations of a 0.5% decline and suggests the bottoming out of the economy may not be as severe as some economists had expected.

Since June, the central bank has embarked on a deep easing of monetary conditions, with 75 basis points of reduction in the official cash rate and another 50 basis point cut anticipated next month. The New Zealand dollar strengthened to 68.49 U.S. cents after the report from 68.17 cents before the release.

"Our base case calls for a 50 basis point rate cut at the next meeting as a risk mitigation move against financial market dislocation," said Shamubeel Eaqub, economist at Goldman Sachs JBWere. Still, if credit strains persist, "the risk is of a gentler economic recovery."

Eaqub predicts Reserve Bank Governor Alan Bollard will continue to lower the OCR to 6%, a "neutral" level, before pausing to reassess economic conditions.

Household consumption expenditure fell 0.3% in the second quarter, service industry activity declined 0.4% and goods-producing industry activity dropped 0.2%.

The better-than-expected second quarter GDP number "is welcome news ahead of the expected recovery in the final quarter of this year," Finance Minister Michael Cullen said in a statement.

By Jonathan Underhill

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