Economy may have contracted for third quarter: Treasury

Tuesday 9th September 2008

New Zealand's economy may have extended its recession into the third quarter, reflecting a contraction in residential property investment, the Treasury said.

The $106 billion economy may resume its expansion in the final quarter of the year, the Treasury said in its August Monthly Economic Indicators report.

"At this stage we are not ruling out that a further small fall may occur in the September quarter," the department said. "We continue to expect growth to turn positive in the December quarter owing to the combined effects of tax cuts, recovery from the drought and the weakening New Zealand dollar."

The New Zealand dollar has dipped to a 22-month low in the past seven days and recently traded at 67.25 US cents, having slipped down from more than 81 cents in March. A weaker currency is a boon for exporters such as Fonterra Cooperative Group because it boosts the value of export sales when they're brought home.

The currency may extend its slide with the central bank expected to cut its official cash rate a quarter point to 7.75% on Thursday, and continue to lower the rate through this year.

The Treasury cited a decline in retail sales volumes in the second quarter, a weakening labour market and rising jobless rate. It said high mortgage rates and low inflows of migrants were sapping demand in the housing market.

While companies plan to raise prices to pass on the impact of higher costs of fuel and raw materials, slackening demand may hamper their efforts, the Treasury said.

Annual average growth is expected to be about 0.5% in the year through December 31.

By Jonathan Underhill

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