NZ economy shrank 0.3% in first quarter on farming, construction

Friday 27th June 2008

New Zealand's economy shrank in the first quarter, led by agriculture and the construction industry, stoking expectations the economy may be dipping into recession this year.

Gross domestic product contracted 0.3% in the first three months of the year, Statistics New Zealand said in a report. That matched the average forecast in economist surveys. The economy expanded 0.8% in the fourth quarter 2007.

The GDP report caps a dismal week for New Zealand economic figures, after consumer confidence slumped in the June quarter and the current account deficit was a larger-than-forecast 7.8% of gross domestic product. An economic slump has stoked optimism the central bank will cut its key rate from a record 8.25% this year.

"It's important not to forget that Q2 is shaping up to be at least as weak as Q1," Danica Hampton, currency strategist at Bank of New Zealand, said before the figures were released.

The report showed agricultural activity fell 5.6% in the first quarter, the biggest decline in a decade, as a drought in parts of the country reduced output and drove up costs. Construction activity fell 5.2% and manufacturing 1.2%.

Household spending fell 0.4% after a 0.5% increase in the previous three months. That's the first quarterly decline since June 2004. Spending on durable goods such as vehicles, furniture and major appliances dropped 3.4%.

Retailers Warehouse Group and Briscoe Group cut their earnings forecasts this week on a drop in consumer spending, sending their shares lower. Fletcher Building, the nation's biggest construction firm, fell 4.2% and has 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% to 3% target band in the medium term after peaking at a forecast 4.7% in the September quarter.

By Jonathan Underhill

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