NZIER says double-dip recession avoided as economy rebounds in December, but challenges remain in medium-term

The New Zealand economy will not shrink for two consecutive quarters, rebounding in the three months to December after contracting in the September quarter, the New Zealand Institute of Economic Research (NZIER) says.

However, the medium term would be challenging as households continued to pay down debt, government restrained spending and the housing market remained soft, NZIER said.

In its Quarterly Survey of Business Opinion (QSBO), the NZIER said the December quarter recovery was concentrated in large firms and in the upper North Island. The economic recovery remained shallow and slow compared to previous cycles, NZIER Principal Economist Shamubeel Eaqub said.

"A return to growth has brightened business mood: seasonally adjusted business confidence rose from -8% to 3%. This confidence is slowly filtering through to new hiring and investment, but this needs to accelerate to drive a sustainable recovery. Continued deleveraging by households, restrained government spending and a soft housing market will influence the medium term outlook,” Eaqub said.

'RBNZ can hold OCR until June'

ASB economist Christina Leung said the Reserve Bank of New Zealand would be encouraged by today's release, "given it indicates a broad-based improvement across sectors albeit at a gradual pace".

"In addition, with inflation pressures looking contained for now there is little urgency to raise the OCR. As such, we expect the June meeting will be the earliest 'live' meeting for the RBNZ to contemplate resuming the reduction of monetary policy stimulus. The survey suggests the economy will regather after Q3’s dip, but that the pace of the underlying recovery is modest rather than strong," Leung said.

Official figures from Statistics New Zealand show the New Zealand economy shrank 0.2% in the September quarter after five consecutive quarters of growth out of a recession that began in March 2008 and lasted five quarters. Stats NZ will release official figures for December quarter GDP on March 24.

See the release from NZIER:

Double-dip recession avoided; medium term challenges linger

NZIER’s Quarterly Survey of Business Opinion (QSBO) shows the economy rebounded in the December 2010 quarter, after contracting in September. Firms’ experienced trading activity improved from -15% to -1% on a seasonally adjusted basis.

The rebound was patchy, concentrated in large firms and in the upper North Island. Activity fell sharply in Canterbury, reflecting post-earthquake economic disruption. Nevertheless, most sectors experienced better conditions in December. There was a particularly large rebound in retail sales volumes. Most of the survey responses were received in the first half of December, so this will not reflect the lacklustre retail environment closer to Christmas.

“The economy rebounded from a weak September quarter avoiding a double dip recession. The recovery remains shallow and slow compared to previous cycles. A return to growth has brightened business mood: seasonally adjusted business confidence rose from -8% to 3%. This confidence is slowly filtering through to new hiring and investment, but this needs to accelerate to drive a sustainable recovery. Continued deleveraging by households, restrained government spending and a soft housing market will influence the medium term outlook,” said Shamubeel Eaqub, Principal Economist at NZIER.

Inflationary pressures ease

Inflation remains subdued and actual prices charged eased slightly (12% from 15%). Cost and price expectations also eased, following earlier GST-related increases. Firms report a lack of demand; this has reduced their ability to raise prices. Capacity pressures, which indicate medium term inflation, moderated. Capacity utilisation of manufacturers and builders eased to the long run average (89.0% from 90.4%). These figures suggest that the RBNZ can continue to hold the OCR at current levels for at least six months.

Labour market improves

Labour market indicators remain resilient. Actual hiring improved (-3% from -12%) and is consistent with better employment opportunities. Labour is becoming harder to find, which will support wage growth over the next year.

Canterbury earthquake disruption; building employment surges

The Canterbury earthquake led to significant economic disruption. Seasonally adjusted trading activity slumped in Canterbury (-33% from -6%, compared to the rest of New Zealand rising from ‑15% to 4%). All sectors reported weaker activity in December, but Merchants showed the largest slump. The region is gearing up for reconstruction activity. Construction employment surged in the region (28% from -11%, while the rest of New Zealand remained weak at -11% from -15%).

Here is ASB economist Christina Leung's take on the QSBO:

Today's QSBO release paints a picture of NZ economic activity gradually improving, while inflation pressures remain contained for now. Our indicator from the experienced own activity measure is in line with a 0.4% increase in GDP over Q4. The report notes the Canterbury earthquake had a negative impact on experienced own activity. Meanwhile, improved profitability underpinned higher business confidence over Q4. Encouragingly, the improvement in activity was broad-based across the sectors.

In particular, the manufacturing sector reported a rebound in activity on the back of improvement in both domestic and export sales. This is positive for the economic recovery given manufacturing is a key sector of the NZ economy, and activity in this sector was one key area of downside surprise in the recent Q3 GDP report.

The recovery in activity means that businesses are keeping expansion plans on track, with a slight improvement in investment intentions (which are still around historical averages) and a net number of businesses continuing to indicate intentions to expand their workforce. Businesses are indicating increased difficulty in finding skilled labour, and we expect this will flow through to emerging wage pressures over the coming year. Meanwhile, businesses reported easing cost pressures, and fewer businesses are reporting they intend to raise prices. These measures suggest inflation pressures remain contained for now.

Implications

The RBNZ will be encouraged by today's release, given it indicates a broad-based improvement across sectors albeit at a gradual pace. In addition, with inflation pressures looking contained for now there is little urgency to raise the OCR. As such, we expect the June meeting will be the earliest 'live' meeting for the RBNZ to contemplate resuming the reduction of monetary policy stimulus. The survey suggests the economy will regather after Q3’s dip, but that the pace of the underlying recovery is modest rather than strong.

(Updates with ASB comment)