Economic recovery stalls, households keep lid on spending

Thursday 23rd September 2010

New Zealand’s economic growth hit the brakes in the second quarter, falling short of expectations, and supporting the Reserve Bank’s decision to pause in tightening interest rates. The kiwi dollar tumbled.

Gross domestic product expanded 0.2% in the three months ended June 30, according to Statistics New Zealand, a quarter of the 0.8% pace predicted by a Reuters survey of economists and the 0.9% forecast from the Reserve Bank. Growth in the first quarter was revised down to 0.5% from 0.6%. The kiwi dollar sank 0.7% to 73.08 US cents after the release.

“The economy has effectively stalled and lost momentum in the second quarter,” said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

“The Reserve Bank is well and truly out of play for the rest of the year.”

Economic growth has stumbled this year as optimism the world was coming out of the global financial crisis in a V-shaped recovery was eroded by fears about Europe’s sovereign debt. That’s prompted central bank Governor Alan Bollard to rein in his projected track of rising interest rates, and keep a certain amount of stimulus in the economy.

Last week, Bollard held the official cash rate at 3% and cut more than a percentage point from the bank’s forecast increases in the 90-day bank bill in the coming years. Markets cut 8 basis points from the expected hikes to the OCR to 57 points, according to the Overnight Index Swap curve.

Household spending was flat in the period, after a 0.4% increase in the March quarter, as people continued to pay down debt and keep a closer eye on spending. Spending on durable goods such as furniture, appliances and clothing rose 0.8% while expenditure on services such as phone calls, domestic air travel and medical services shrank 0.6%. Spending on non-durable goods was flat as increased spending on food offset declines in tobacco and liquor.

Inventories were run down by $530 million over the June quarter after a $57 million build-up in the previous period. Manufacturers led the decline, and leading indicators have shown the sector contracted in recent months.

Growth in government spending continued to outpace the private sector, with government consumption expenditure rising 0.5%, compared to a 0.1% increase in private spending.

Construction bounced back in the period, growing at a 6.4% pace after a 0.8% rise in the March quarter, the biggest quarterly gain in seven years. The sector is expected to benefit from the reconstruction of Christchurch after Canterbury was hit by a 7.1 magnitude earthquake.

Statistics NZ added to the chorus of voices saying the earthquake isn’t a boon for the nation. In a section on the impact of the quake, the department said “looking at GDP in isolation fives a false impression that this disaster will be good for the economy.”

The GDP data doesn’t take into account the $2 billion to $4 billion worth of damage to capital assets, or that building work and consents will need to be replaced, businesses are closed and people are unable to go to work, the department said.

Export volumes extended its growth, accelerating at 1.3% in the three months through June, compared to a 1.2% gain in the previous quarter, with metal products, machinery and equipment the biggest contributor.

Primary industry growth slowed to 0.6% in the quarter from 1.5% in the March period, with fishing, forestry and mining activity leading the charge.

As at June 30, GDP was $33.54 billion, the most since the June quarter in 2008.

Businesswire.co.nz

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