Economic growth continues, but at a slower rate

Thursday 24th June 2010

New Zealand’s economic growth slowed in the first quarter, as expected, with the private sector remaining subdued and households reluctant to ramp up their spending.

Gross domestic product expanded 0.6% in the first three months this year, according to Statistics New Zealand, matching the median in a Reuters survey, but below the Reserve Bank’s 0.8% forecast. Growth in the fourth quarter was revised up to 0.9% from 0.8%. Government spending grew 1.7%, and underpinned the quarterly growth, mostly reflecting the purchase of a new frigate during the period. Excluding the vessel, central government expenditure increased 0.8%, as the National-led government spent more on administration and education.

Private consumption was subdued, with household expenditure gaining 0.2%, led by retail furniture, major appliances, used cars and clothing, as people hold off from opening their wallets and continue to pay down debt. Spending on services declined 0.1%, following a 0.6% contraction three months earlier, the first back-to-back slide since June 1991.

"The composition of the numbers was weaker - the private consumption number was pretty weak," said Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research. "Most of the recovery was really a lot of public spending and a rebound in housing, which continued to improve from a very low base."

The kiwi dollar fell to 71.23 US cents after the release from 71.30 cents immediately before the announcement.

Last year, New Zealand climbed out of its deepest recession in 18 years, and has since recorded four quarters of growth, as strong Chinese demand for the nation’s raw materials and surging dairy prices lifted export receipts. The rosier outlook encouraged central bank Governor Alan Bollard to embark on tightening monetary policy this month, when he hiked the official cash rate a quarter point to 2.75% in his first increase for three years.

NZIER’s Eaqub said the GDP figures won't be enough to deter the central bank from raising interest rates again, though he is downbeat on the strength of the recovery. "I think they would need some pretty concrete evidence that things are turning down to stop raising rates," he said. "This time around the RBNZ was far too optimistic."

Primary industries grew 1.7% in the quarter, following a 0.5% contraction in the December period, with fishing, forestry and mining activity leading the gains. Milk production underpinned a 0.8% increase in agricultural activity, as surging dairy prices supported growth in the economy.

The retail, accommodation and restaurant sector shrank 0.8% in the quarter, the second biggest contraction behind electricity, gas and water at 2.2%, and service industries were flat in the period.

Businesses continued to build their inventories in the first quarter, up $143 million following a $221 million gain in the December quarter, after they ran down stock through most of last year in the wake of a global recession that sapped demand for goods.

Export volumes of goods increased 1.4% in the March quarter, led by gains in metal products and agriculture.

Businesswire.co.nz

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