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NZ economy contracts 0.4% in the third quarter on spending slump

Tuesday 23rd December 2008

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New Zealand's economy shrank for at twice the pace predicted by the central bank in the third quarter, raising the prospect of more interest rate cuts to revive the worst slump in 10 years.

Gross domestic product fell 0.4% in the three months ended Sept. 30, according to Statistics New Zealand. Economists had expected a contraction of 0.5%, according to the consensus in a Reuters survey.

Reserve Bank Governor Alan Bollard has embarked on the deepest easing cycle since the official cash rate was introduced in 1999 to help revive an economy where inflationary pressures are expectedly to quickly ease. He is expected to cut the OCR to at least 4.5% next month from 5% currently.

The contraction in the third quarter follows a 0.3% decline in the first quarter and 0.2% fall in the second amid a slump in housing demand, soaring costs for food and fuel, and a drought that crimped farm production. Economists predict a second round impact as global financial market turmoil leaks into the wider economy, leading to lower company profits and job cuts.

"Bigger disappointment looms, with any scope for a material rebound in growth surely being squashed by the degree of global recession we're now staring at," Stephen Toplis, head of research at Bank of New Zealand, said before the figures were released. "We can expect 2009 will be another tough year."

Household spending, which makes up almost two-thirds of the economy, fell 0.2% in the three months ended Sept. 30, the third quarterly decline, according to the government statistician. Service industries, which include transport, communications and retailers, fell 0.2%, the second quarterly slide.

Construction activity dropped 1.2% in the latest quarter, driven by a decline in residential building and construction trade services. The average New Zealand house price fell 6.8% in November from a year earlier, the second monthly slide of that magnitude, according to QV valuation figures this month.

Activity expectations among retailers slumped 21 percentage points to a net 49%, a record low, according to National Bank Business Confidence survey last week. Retailers including Warehouse Group and Briscoe Group are hoping for a pick-up in spending through the peak Christmas period after trimming their earnings outlook earlier in the year. Manufacturing fell 2.5%.

Activity in primary industries rose 2.1% in the third quarter, reflecting a 6% increase in farming production on increased dairy output and meat processing.

By Jonathan Underhill

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