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NZ economy probably shrank in first quarter on retail, building

Tuesday 24th June 2008

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New Zealand's economy probably shrank in the first quarter, paced by construction and manufacturing, increasing the prospects for a recession.

Gross domestic product may have contracted 0.3% in the first three months of the year, according to economist surveys, the first dip since 2005. Economists at Bank of New Zealand and Westpac also forecast a contraction in the current quarter, which would mark the first recession in a decade.

"Economic indicators are expected to print consistent with the slowdown becoming entrenched in the second quarter," Mark Walton, markets economist at BNZ, said in a report yesterday. "We find little reason to be optimistic about growth prospects for the second half of the year."

The slowdown has crimped sales and earnings at retailer Warehouse Group and construction company Fletcher Building and sent the benchmark NZX 50 index to the lowest in more than two years on Friday. An economic slump has stoked optimism the central bank will cut its key rate from a record 8.25% this year.

Rising prices of raw materials, fuel and basic foods, and high borrowing costs have sapped consumer spending and housing demand.

Credit card billings fell 1.1% in May, according to central bank figures yesterday. That suggests, "household spending is collapsing as the economy slows," Danica Hampton, currency strategist at BNZ, said.

The contagion will spread through the economy, says Westpac chief economist Brendan O'Donovan.

"Softer final demand will choke back up the supply chain into weaker transport distribution and manufacturing," he said in his June 19 preview of GDP. Weak data will be "more fodder for easier monetary conditions," he said.

Reserve Bank governor Alan Bollard this month said economic activity is weakening enough to bring inflation back within the bank's 1% to 3% target band in the medium term after peaking at a forecast 4.7% in the September quarter.

While record-high dairy prices are buoying farmers, Westpac predicts drought is denting agricultural production enough to slice 0.5% off GDP in the first and second quarters.


By Jonathan Underhill

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