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NZ still on track for gradual recovery after weak 4Q GDP drives down kiwi

Thursday 22nd March 2012

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New Zealand is still on track for a gradual economic recovery even though growth in the fourth quarter was half the pace expected and caused the kiwi dollar to shed almost half a US cent, economists say.

The local currency dropped as low as 81.03 US cents after figures showed gross domestic product grew 0.3 percent in the fourth quarter against a consensus forecast of 0.6 percent. The kiwi was at 81.46 cents immediately before the report was released.

Growth also missed the Reserve Bank’s prediction, stoking speculation the bank’s next governor may be in less of a hurry to raise the official cash rate from a record low 2.5 percent.

A weak manufacturing sector was the biggest drag on GDP in the final three months of 2011, shrinking 2.5 percent after a third-quarter expansion of 2.2 percent. Food, beverage and tobacco manufacturing was the biggest drain on the sector, though dairy products manufacturing grew in the period.

An inventory build-up was behind manufacturing activity in the September quarter and those were run down in the December quarter. Total inventories were built up by a further $19 million in the three months ended Dec. 31.

“The picture of a gradual recovery in underlying activity remains in place,” ASB economist Christina Leung said. “The recovery in activity remains patchy in some areas, and while overall business confidence has improved, caution towards expansion of operations remains.”

The GDP report comes after respondents to the New Zealand Institute of Economic Research’s quarterly survey this week cut their growth expectations for a second time as the rebuild in Canterbury suffers from ongoing delays amid persistent seismic activity.

Traders haven’t changed their bets on the Reserve Bank’s interest rate outlook, pricing in 36 basis points of increases to the official cash rate in the next 12 months, according to the Overnight Index Swap curve.

“Today's data reinforces the risk that interest rate hikes are delayed until 2013,” said Phil Borkin, economist at Goldman Sachs. Growth was a “meaningful downside miss.”

The nation’s agriculture sector grew 3.5 percent as good growing conditions bolstered milk production. That cropped up in yesterday’s balance of payments figures, with fatter dairy exports underpinning a narrower current account deficit of $2.03 billion in the quarter.

Since then, dairy prices have been falling on Fonterra Cooperative Group’s online trading platform, and the exporter recently trimmed its forecast payout to farmers as a resiliently high kiwi dollar drags down returns on foreign sales.

Darren Gibbs, chief economist at Deutsche Bank NZ, said deleveraging by farmers over the past two years has meant the record-high commodity prices they’ve been enjoying haven’t been passed through to the rest of the economy, and more of that will probably flow through this year.

Growth in finance, insurance and business services underpinned the economy’s expansion, with the sector up 1.3 percent in the period.  

The retail, accommodation and restaurants sector grew 2.2 percent in the period as the hospitality industry cashed in on the tail-end of the Rugby World Cup. The sector is enjoying its highest quarterly level since the series began in 1987, when the inaugural Rugby World Cup was held in New Zealand.

The total volume of spending grew 1.6 percent in the quarter, underpinned by a 5.7 percent increase in spending by foreign visitors, many of whom were in New Zealand for the rugby.

Household spending continued to rise in the quarter, growing 0.8 percent for an 11th straight gain. The volume of durable goods rose 4 percent in the period, the biggest gain since March 2007, while non-durable goods consumer advanced 0.3 percent.

Annual household spending was up 2.4 percent in the calendar year 2011, accelerating from growth of 2.1 percent in 2010.

Construction activity increased 1.5 percent in the quarter, with increases in both residential and commercial building work.

Finance Minister Bill English said the December quarter was challenging, but the “economy will continue to expand in 2012 and we have a number of opportunities that will provide impetus for solid growth over the next three years.”

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