New Zealand's economy suffered its biggest contraction in eight years in the third quarter and the broad-based slump reinforced expectations that global headwinds will keep the nation in recession well into 2009. Gross domestic product fell a seasonally adjusted 0.4 percent as consumers spent less, businesses cut investment and weak global markets and prices hit exports, data showed on Tuesday, backing the case for more central bank interest rate cuts.
The drop was the biggest quarterly decline since the June quarter 2000, and followed a 0.2 percent fall in the previous quarter. "This means interest rates still have to come down," said J.P. Morgan chief economist Stephen Walters. "We suspect the recession will last for another one or two more quarters to come." Central bank Governor Alan Bollard said earlier this month the economy would probably emerge from a "shallow" recession in the fourth quarter into a period of "shallow" growth.
However, most economists are less optimistic and doubt New Zealand can return to growth so soon given that its major trading partners including Japan, the United States, and the euro area are also in recession. The data reinforced their view of widespread weakness likely to carry over to quarters ahead.
"Very weak demand, pretty much across the board, consumers spending less, businesses investing less, less exports, flowing through to retailers, wholesale trade, manufacturing and transport," said Doug Steel, economist at Westpac.
PROLONGED DOWNTURN: Household spending fell 0.2 percent, export volumes fell 3.1 percent and fixed capital investment plunged 8.6 percent. The declines were only partly offset by higher agriculture output and government spending. "We expect the economy to remain in recession through to mid-2009, but there is a growing likelihood of a more prolonged downturn. Much depends on how badly the United States, in particular, is disrupted and for how long," said ASB Bank Jane Turner.
Finance Minister Bill English said the data was no surprise and supported the policy of fiscal stimulus, the newly elected government has started. "We have already started implementing our economic plan, which includes tax cuts to put more money in New Zealanders' pockets, bringing forward infrastructure spending to support economic growth and extracting better value out of government spending," he said in a statement.
The headline number was slightly better than the 0.5 percent drop forecast in a Reuters poll, but a tad worse than the central bank's 0.3 percent prediction and the New Zealand dollar was unmoved by the data, sticking around $0.5720/30. The yield on the March bank bill contract was 10 basis points lower at 4.31 percent.
New Zealand is in its first recession since 1997-98, which followed the Asian financial crisis. The central bank has cut rates four times since July by a total of 325 basis points to a five year low of 5 percent, and said further small cuts are likely.
Most analysts see rates falling to 3.5 percent by mid-2009. The next rate review is on January 29. The economy in the third quarter was 0.1 percent smaller than the same quarter a year earlier, the first time since 1998. Annual average growth slowed to 1.7 percent from 2.5 percent in the year to June.