By Bernard Hickey
New Zealand's GDP grew just 0.2% in the June quarter, down from growth of 0.5% in the March quarter and below economists' forecasts for growth of around 0.7%.
The Reserve Bank was expecting quarterly growth of 0.9%.
The New Zealand dollar fell sharply after the news and wholesale interest rates also fell in expectation the weaker economy may allow the Reserve Bank to keep the Official Cash Rate on hold at 3% for longer than expected.
Before this result economists had expected the OCR to be on hold until early 2011. The New Zealand dollar dropped to 73.2 USc from 73.8 USc on the news.
The 90 day bank bill rate dropped from 3.16% to 3.15% and the 3 year government bond yield dropped from 4.10% to 4.01%.
Construction spending rose 6.4% in the quarter and new capital investment rose 6.2%, but this was almost completely offset by flat consumer spending and a 4% fall in manufacturing output in the quarter.
(Updated with more market reaction detail, reaction from ANZ, BNZ, ASB, Westpac economists, NZMEA CEO John Walley)
'On hold until March'
BNZ economist Stephen Toplis said the growth was unequivocally soft with activity generally weaker across the board.
"Total economic activity remains 1.5% below its previous peak and is unlikely to get back to this peak until the end of the first quarter next year. Worse still, if you look at the GDP data on a per capita basis you find that activity is down 4.2% from peak and is no higher now than it was back in the June quarter of 2004," Toplis said.
"The weakness in today’s data justified the cautious stance that the RBNZ adopted in its recently released Monetary Policy Statement. Indeed, given that the RBNZ appears relatively easily spooked at the moment, today’s data are likely to be seen as particularly frightening. Formally, the RBNZ was forecasting a 0.9% outturn for Q2. It admitted downside risks to this but would not have been contemplating a 0.2% pick in that mix," he said.
"This being so it firms our view that the next hike in the cash rate will not be until the end of Q1, 2011 at the earliest."
ANZ economist Mark Smith said the economy had lost momentum and the figures were well below expectations.
"Based on today’s GDP numbers, the RBNZ is well and truly on hold until next year," Smith said.
"Since emerging from recession, growth has been anaemic and not of the above-trend variety normally expected from typical cyclical rebounds," Smith said.
"Deleveraging remains a powerful growth suppressant. The economy is also undergoing a physical resource shift away a consumer-centric model towards more earning centric growth. While there was only limited evidence of this dynamic in Q2, such a physical transformation for the economy will take a considerable period to take hold," he said.
ASB economist Nick Tuffley said the Northland drought dragged on agricultural production more than expected and communications output fell sharply for the third consecutive quarter.
"Today’s result reinforces the case for the RBNZ to remain on hold. Now we do not expect the RBNZ to resume the process of returning monetary conditions to normal levels until March 2011," Tuffley said.
Westpac economist Brendan O'Donovan said the drought was a factor in weaker manufacturing activity and that mismeasurement may be responsible for a fall in telecommunications activity, but that the weak GDP justified the Reserve Bank's dovish stance in the September quarter Monetary Policy Statement.
"The reluctance of consumers to participate in the recovery was the rationale for the RBNZ's change in stance at the September MPS. Now it turns out that the consumer was even more reluctant over the June quarter than the RBNZ previously realised - further justification for a dovish stance," O'Donovan said.
""The RBNZ's internal projection for interest rates in 2012 could now be about 20bp lower than the September MPS track. We reaffirm our call that the RBNZ will not hike until March next year. Appropriately, the NZD fell half a cent, and the 2-year swap rate fell 7 basis points. "
'Cut the OCR'
New Zealand Manufacturers and Exporters Association (NZMEA) Chief Executive John Walley said the weak GDP figures and wider balance of payments deficit showed imbalances remained in the economy.
“The Government has talked at length about rebalancing the economy towards exports, saving and business investment, but the outcome clearly demonstrates this is not occurring,” Walley said.
“A high and volatile exchange rate still discourages growth in exports and the lack of tax on assets still encourages investment in property rather than businesses in the traded economy," he said.
The Reserve Bank should have cut the Official Cash Rate this month, he said.
“This latest set of figures shows that fundamental changes are necessary and playing around the edges is not working.”
Here is more detail below from Statistics NZ:
"All manufacturing sub-industries, with the exception of wood and paper products, were down in the June 2010 quarter," acting national accounts manager Stephen Oakley said. "The largest decline was in food, beverage, and tobacco manufacturing."
GDP for the year ended June 2010 was up 0.7 percent when compared to the year ended June 2009. This annual increase in GDP is the first since the year ended September 2008. The expenditure measure of GDP increased 0.4 percent in the June 2010 quarter.
The production measure of GDP shows the volume of goods and services produced in the economy, while the expenditure measure shows how those goods were used. The volume of goods and services purchased by New Zealand households was flat this quarter.
An increase in durable goods (furniture and appliances, clothing and footwear, and used cars) was offset by a decrease in services (spending on phone calls, medical services, and domestic air travel). Gross fixed capital formation, which measures investment in fixed assets, was up 6.2 percent in the June 2010 quarter.
This is the largest increase in fixed asset investment since the March 2004 quarter. The main contributors to the increase in fixed asset investment were residential building investment, up 11.1 percent, and investment in intangibles, which includes mineral exploration, up 10.3 percent.
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