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Consumer Confidence Drops to 17-Yr Low

Wednesday 25th June 2008

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New Zealand consumer confidence plummeted to the lowest since the 1991 recession as rising household costs and a cooling jobs market prompted people to cut back on spending.

Consumer confidence fell 15 points to 81.7 this month, according to the Westpac McDermott Miller Consumer Confidence Index. A number below 100 indicates pessimists outnumber optimists.

The survey suggests New Zealanders haven't felt cheered by tax cuts due to start this year and a farming sector basking in record dairy prices. Figures this week are expected to show the economy shrank in the first quarter and is heading back into recession this year.

"One of the economic debates has been to what extent have rising fuel, food, debt servicing costs, falling house prices and a softening labour market been offset by a higher dairy payout and tax cuts," Robin Clements, senior economist at UBS New Zealand, said in a report.

"The further collapse in consumer confidence cements in likelihood of the RBNZ easing this year," starting in September or even July," Clements said.

A net 40.8% of consumers considered they were worse off financially than a year ago, a drop of 21.9 percentage points from the March survey and the lowest reading since 1991.

"Perceived purchasing power has taken a hammering," Donna Purdue, senior economist at Westpac, said in the report. "These responses suggest we should brace ourselves for continued weak spending, particularly on discretionary items, in the months ahead."

Figures this week may show gross domestic product may have contracted 0.3 percent in the first three months of the year, according to economist surveys. High borrowing costs and a slide in house prices have also helped weigh on consumer sentiment.

The central bank's official cash rate of 8.25% is the highest since the bank started using the instrument of monetary policy and has helped push rates on fixed-rate mortgages above 9%.

Shares of construction firm Fletcher Building Ltd. have about halved in value since October.

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

By Jonathan Underhill

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