GDP falls 0.2% in Sept qtr vs expected 0.2% rise; Due to falls in primary, goods producing industries; NZ$ drops under 74 USc

By Alex Tarrant

New Zealand’s Gross Domestic Product fell 0.2% in the September quarter, due to falls in activity in the primary and goods-producing industries, Statistics New Zealand said this morning.

The fall in economic activity over the quarter compared to market expectations of a 0.2% rise in GDP. The contraction came after five consecutive quarters of growth out of the recession which began in March 2008 and lasted five quarters.

Most economists said the weak result made it more likely the Reserve Bank would hold off hiking the Official Cash Rate until the June quarter at the earliest. Westpac even said a September quarter hike was now more likely.

The New Zealand dollar fell below 74 USc immediately after the news. Wholesale interest rates nudged lower.

'Still on track,' English says

Finance Minister Bill English said the New Zealand economy was still on the path to recovery and that he was "actually quite confident that the economy will build momentum in 2011 and beyond".

“Unemployment has peaked and is coming down – although not as fast as we would like. However, we are enjoying strong export prices and we’re hosting the Rugby World Cup next year, which will be good for the economy," English said.

“It’s important that we look through the quarter to quarter figures and focus on our long-term challenge, which is building a sustainable recovery built on savings and exports rather than borrowing and consumption," he said.

“On that score, we have seen some encouraging signs in recent months. If anything, the figures today reinforce the need for us to press on with our programme to build faster growth around the earnings sign of the economy. That will be the Government’s firm focus over the next few years,” English said.

'Not as strong as we thought'

Stats NZ also revised down GDP growth in the June 2010 quarter from 0.2% growth to 0.1%.

The Reserve Bank of New Zealand was expecting GDP to rise 0.3% over the September quarter, with today’s figures suggesting the central bank will be comfortable holding the Official Cash Rate at 3% until the June quarter of next year.

Annual GDP rose 1.4% compared with the September 2009 year, Stats NZ said. This followed an annual rise of 0.6% in the June quarter after six quarters of annual contraction.

Double dip?

“The decline in GDP this quarter was due to weakness in the primary and goods-producing industries,” Stats NZ national accounts manager Rachael Milicich said.

Stats NZ said the main contributors to the decline in economic activity in the September 2010 quarter were manufacturing, down 1.7%, following a 4.3% decline in the June quarter; fishing, forestry and mining, down 5.5%, mainly due to lower mining activity; and construction, down 2.5%, with declines in both residential and non-residential building.

Partly offsetting these declines were increases in transport and communications (up 2.1%), and wholesale trade (up 2.4%), Stats NZ said.

The Canterbury earthquake on September 4 could have had a negative impact on GDP in the September quarter as many Canterbury businesses were closed and people were unable to work, Stats NZ said.

It was impossible to isolate the impacts of the earthquake, although the Canterbury region generally accounted for 12% of national GDP, Stats NZ said.

Expenditure down

The expenditure measure of GDP fell 0.4% in the September quarter, Stats NZ said.

“For the same period the volume of goods and services purchased by New Zealand households was up 0.5%.

Household spending on durable goods (furniture and major appliances) and services (communications and domestic air travel) increased, while spending on non-durable goods fell (mainly due to alcoholic beverages).

Economist reaction

ASB economist Jane Turner said the lower than expected GDP figure, as well as the downwardly-revised June growth suggested New Zealand's economic recovery stalled in the middle part of 2010:

GDP was much weaker than the market, ourselves and RBNZ were expecting. The weakness is a result of weak housing demand and activity, poor weather conditions and a decline in manufacturing activity. We expect that both manufacturing activity and housing construction will recover over the next year.

However, weather conditions present ongoing challenge to NZ agricultural production. There remain some signs that underlying demand may not be quite as weak as the figures suggest. Business confidence has firmed.  Indeed, the strength capital imports point to an increase in business investment on the horizon. Furthermore, the strength seen in transport and wholesale activity is not consistent with an economy going sideways.

Nonetheless, with a negative GDP number proving a disappointment ahead of Christmas, the RBNZ will certainly be in no hurry to resume lifting the cash rate until it is very confident that the economic recovery has regained traction. We continue to expect the RBNZ will resume lifting the OCR in June next year, although rate hikes over 2011 will be very gradual.

HSBC economist Paul Bloxham said he still expected growth through 2011, but that the risks of a later rate hike from the RBNZ had increased.

Looking ahead, a slower recovery in demand and exchange rate strength in early Q4 - albeit retraced in recent weeks – are likely mean that growth has stayed weak in the closing months of 2010. Household spending in Q4 is likely to be fairly weak, due to some Q3 pull-forward. Business sentiment has also been weaker than in the first half of the year.

We continue to expect that the economy will recover through 2011, driven by the current elevated level of meat and dairy prices, which will support incomes, rebuilding efforts in Canterbury and a boost to service exports from the Rugby World Cup in September/October 2011. Supporting this medium-term view, the labour market is making a gradual recovery, with the trend unemployment rate 0.5 percentage points below its late 2009 peak: although, at 6.4%, it is still well above the natural rate. These numbers are weaker than was expected and it looks as though growth will continue to be weak in Q4.

The fundamentals remain healthy though, and we still expect a recovery in demand through 2011. We continue to expect the RBNZ to resume its tightening cycle in Q2 2011, though today's numbers clearly provide some downside risk to this expectation.  

ANZ economist Mark Smith also saw the potential for a later hike in the OCR.

The RBNZ is well and truly on hold until at least June next year, and a later resumption of the tightening cycle cannot be ruled out.

There are a number of headwinds still facing the New Zealand economy, with deleveraging still a powerful growth suppressant. We still see better prospects but this is very much a second half of 2011 story  

JP Morgan economist Helen Kevans said a double dip can be avoided, but she has extended her forecast for the next rate hike until June from March.

The threat of a double-dip recession in New Zealand has become very real, but we think this outcome will be avoided. Post-earthquake reconstruction work, higher export volumes and elevated commodity prices, and the positive economic effects related to the Rugby World Cup will help GDP accelerate in 2011. In 3Q10, though, the economy unexpectedly contracted again, with GDP falling 0.2% over the quarter (J.P. Morgan and consensus: +0.1%) compared to a downwardly revised 0.1% in 2Q (previously 0.2%).

The barely-there growth that preceded today’s negative GDP print means the economy has expanded less than 2% since it exited recession in more than a year ago. With the recovery underway clearly having stalled, and having taken into account the recent run of disappointing data, RBNZ Governor Alan Bollard has more scope to leave the current, stimulatory policy settings in place for much longer.

We had, until now, expected that the tightening cycle would resume in March. We now believe, however, that a June resumption is most likely, by which time the economy should be growing again. For now, low interest rates seemingly are having a less stimulatory effect than in the past.  

BNZ economist Doug Steel said the following:

For now, and in the current environment, it is not only about activity growth. It is about putting what activity we have on a firmer footing. This seems to be the case at present with more saving, leading to less credit per dollar of income.

New Zealand is de-leveraging and reducing risk. We saw evidence of such in yesterday’s Q3 balance of payments data with an improving international investment position. Clearly, there is still a ways to go,as rating agency Standard and Poor’s pointed out again yesterday. Still, we are moving in the right direction in this regard and should be viewed as a positive in its own right, even if it means slower growth in the interim.

The soft looking consumption growth in today’s data, despite being boosted by some pre-GST spending, is more confirmation of cautious spending behaviour. But we think that stronger nominal income growth will eventually put upward pressure on interest rates, assuming the world economy hangs together and without a decent lift in productivity growth. How much pressure is also dependent on the wider, and more variable, credit spreads, but the direction is clear.

Even after today’s soft result, we suspect that the economy and market will have a different feel to it come the New Year. For a start, a decent break can do wonders for seeing the glass-half-full rather than half-empty. But more fundamentally, we think the first two major data prints of the New Year – the QSBO and CPI – could well set the 2011 tone of stronger economic data and more inflationary risk than is currently priced into a market that has been put through the ringer and back again in 2010. 

Westpac's economists changed their view to a September quarter hike after the weak figures.

The state of the economy as at September 2010 is clearly weaker than previously thought. The negative output gap has become a yawning chasm, meaning there will be little pressure on medium term inflation for a while yet. The RBNZ has indicated that it expects to leave the OCR on hold until Q3 next year. Today's data reduces the likelihood that hikes will be brought forward, so we have altered our OCR call.

We now expect the next hike to occur in September 2011. Despite the weak historical numbers, we still think there is every reason to expect a stronger performance in 2011. The housing market is showing signs of stabilisation thanks to lower interest rates and healthier net migration. This should improve the consumer mood next year, although it'll be no party. 2011 will feature a Rugby World Cup and substantial earthquake reconstruction activity. Hopefully, 2011 will not feature such severe droughts as 2010.

And finally, New Zealand's terms of trade have been going from strength to strength. This basically means New Zealand Inc has had a national pay rise, which should eventually perk the economy up. There was only a small market response, perhaps reflecting market fatigue at the interminable run of weak NZ economic data. The NZD fell 15 pips and swap rates across much of the curve fell 3bps.  

Political reaction

Finance Minister Bill English said New Zealand's recovery was still on track and the latest figures fit with his comments the recovery would be bumpy.

New Zealand’s economic recovery remains on track, despite figures today showing a small contraction in gross domestic product in the September quarter, Finance Minister Bill English says.

“Before this result, we had seen five consecutive quarters of growth since coming out of a deep recession. I’ve said all along that this recovery would be a bit bumpy at times, and that’s proved to be the case.

“We’ve also stressed that building faster ongoing growth will take some time. New Zealand’s economic imbalances have built up over more than a decade – exacerbated by the global recession – and so it will take us more than a year or two to fix them.”

The one-off effects of the Canterbury earthquake and snow storms in Southland also showed through in the September quarter, Mr English says.

“Having said that, I’m actually quite confident that the economy will build momentum in 2011 and beyond.

“Unemployment has peaked and is coming down – although not as fast as we would like. However, we are enjoying strong export prices and we’re hosting the Rugby World Cup next year, which will be good for the economy.

“It’s important that we look through the quarter to quarter figures and focus on our long-term challenge, which is building a sustainable recovery built on savings and exports rather than borrowing and consumption.

“On that score, we have seen some encouraging signs in recent months. If anything, the figures today reinforce the need for us to press on with our programme to build faster growth around the earnings sign of the economy. That will be the Government’s firm focus over the next few years.”

Statistics New Zealand confirmed today that GDP fell 0.2 per cent in the September quarter – the first quarterly fall since March 2009. This left the annual increase in GDP at 1.4 per cent for the year to September.

Labour Party Finance spokesman David Cunliffe said New Zealand's traditional trading partners were leaving New Zealand well behind in terms of growth:

New Zealand’s economic performance is becoming bleaker and bleaker under National’s mismanagement, says Labour’s Finance spokesperson David Cunliffe.

David Cunliffe, commenting on the release today of GDP figures for the September quarter, said the 0.2 percent decline, following an increase of just 0.1 percent in the previous quarter, showed that things are getting worse not better.

"Of huge concern is the continuing freefall of Kiwi manufacturing, down another 1.7% after 4.3% the previous quarter. Fishing, forestry and mining are down 5.5% and construction 2.5%. This is a broad-based slowdown across productive sectors and would be far worse if we did not have record prices for dairy products to cushion it.

"These statistics prove the slowdown trend is not just part of ‘necessary rebalancing’, as National pretends. Cutting capital formation (investment) in transport by 8.3% in a quarter, by 7.4% in residential building and 6.4% in plant and machinery will leave the economy less capable of rebounding in future,” David Cunliffe said.

 “National has had two years at the economic tiller, and still has no economic plan to promote growth and jobs,” David Cunliffe said. "A double-dip recession is now a real possibility, although this may be temporarily offset by Christmas period sales in the fourth quarter. These statistics reaffirm the bad news in last week's HYEFU showing that our economy is heading backwards, and as a result the government's accounts are collapsing.

“National’s mismanagement of the economy has been characterised by three failed ‘initiatives’,” David Cunliffe said.

“Its $23 billion of tax cuts have done nothing to revitalise the economy, but has put more money in the pockets of National’s rich mates while making life tougher for struggling low and middle income earners; its cycleway has created just a handful of jobs; and its ideological tampering with labour laws is knocking the stuffing out of hard-working Kiwis.

“While National fiddles, the increase in unemployment since it took office is costing the country about three quarters of a billion dollars in foregone tax revenue and the direct costs of the unemployment benefit,” David Cunliffe said. “When other assistance is thrown in, the true cost is much higher.

“Meanwhile, our closest trading partners are leaving New Zealand well behind in terms of growth. National can no longer hide behind the global financial crisis back in 2007-08 for its economic mismanagement,” David Cunliffe said. “If our closest neighbours and trading partners can do it, why can’t National do it here?

“There is no excuse. National came in to government with no idea other than to give tax cuts to the wealthy. It has blindly pursued that path, whatever its folly and whatever continuing damage it is causing to the large majority of New Zealanders.

“National’s Christmas message is simple: ‘Haves’ a happy Christmas and ‘have nots’ --- tough luck.”

(Updated with Cunliffe reaction, English reaction, ASB comment, HSBC comment, ANZ comment, JP Morgan comment, BNZ comment, NZ$ moves. Interactive chart below)