By Alex Tarrant
New Zealand’s economy dodged a double-dip recession in the second half of 2010, with gross domestic product (GDP) rising 0.2% in the December quarter, offsetting the 0.2% contraction seen in the September quarter, figures released by Statistics New Zealand show.
Economists had predicted it was touch and go whether or not economic activity would fall again in the final quarter of the year. A Reuters poll of 14 economists had the median expectation for a 0.2% increase in activity over the quarter, although the range included some negative expectations.
Treasury had also warned economic activity at the end of the year was slower than it had expected, hitting the government’s tax take and putting more pressure on its budget decisions even before the February 22 Christchurch earthquake.
The rise in activity in the December quarter was largely driven by a 2.5% growth in activity in the manufacturing industry, a note that will please the government, which is relying on the country’s tradable sector to eat into high unemployment and lead an economic recovery.
This was offset mainly by falls in wholesale trade activity, down 2.7%, and retail trade, down 2%, over the quarter. The fall in retail trade came as households remained wary of their own economic situations, choosing to keep their wallets closed while looking to control spending and pay down debt.
However, Statistics New Zealand said figures for manufacturing and wholesale trade should be considered provisional due to disruptions caused by the February 22 earthquake that hit Christchurch. Eighty per cent of the data used for the wholesale trade component, and 60% of data used for the manufacturing component, come from data processed by Stats NZ’s Christchurch office, and could not be retrieved.
These figures were therefore calculated using unprocessed questionnaire data available to Stats NZ for the December quarter. Revisions will be made in the March GDP figures once the data can be accessed again.
Annual figures show GDP in the year to December rose 1.5% from the same period a year ago. This was up from an annual increase of 1.3% in September, and the highest annual increase since the September 2008 quarter (1.5%).
The 2.5% increase in manufacturing activity during the quarter followed declines of 1.1% in the September quarter and 4.4% in the June quarter, Stats NZ said.
The largest contributions to the rise were a 14% increase in metal product manufacturing – the largest increase since the series began in June 1987; a 5.5% increase in machinery and equipment manufacturing; and a 7.1% increase in petroleum, chemical, plastic and tobacco manufacturing.
Activity in the overall goods-producing industries, of which manufacturing is a component, rose 1.8% in the December quarter, after a 1.3% fall in the September quarter.
The rise in manufacturing, along with a 1.5% rise in construction activity, was offset by a 0.9% fall in electricity, gas and water activity, Stats NZ said.
Meanwhile activity in the services industries was flat in the December quarter, after a rise of 0.2% in September. Activity in finance, insurance and business services increased 0.5%. This was led by real estate and business services, although dominated by business services, Stats NZ said.
Households hold back
Household consumption rose 0.2% in the December quarter, led by a rise in expenditure on services by households.
Volumes of durable goods expenditure fell 1.2% in the December quarter – the first fall in this series since the June 2009 quarter. This was led by a fall in spending on big ticket items, Stats NZ said.
Taking longer than expected to get debt to ideal levels
In Parliament this afternoon before Question Time, Finance Minister Bill English told media whether it was plus 0.2% or minus 0.2% the economy was "pretty flat" in the second half of the last year.
"People are being very careful with their spending, and that means that retailing’s tough, tourism’s tough. The good signs were that manufacturing was up, and we’re pretty positive that, as we get through this year, economic growth will pick up,” English said.
“In a lot of ways the adjustment we’re seeing is the right kind of adjustment. When retail’s flat, it does make it tough for the retailers, but in the longer run, people can’t afford to borrow money to spend it in the shops," he said.
"They know that so they’re not borrowing as much, they’re being careful with their spending. But it would be good news if the economy picks up later in the year. We believe it will.”
Households were making sensible decisions, given that they were "still a bit worried about their job security, a lot of them still have too much debt – as New Zealand does – so they’re not going to rush back to the shops,” English said.
“People have certainly stopped borrowing more. The signs are they’re paying off a little bit of debt, not as much as would be ideal, so we still owe a lot of money to our overseas lenders. I think what we’re learning is that the process of getting our debt levels back to normal after a binge in the last ten years is taking a bit longer than we expected,” he said
Unemployment may have peaked, although uncertainties surrounding the situation in Christchurch could see a further spike before the rebuilding phase began.
“We think unemployment has peaked, and all the forecasts show it coming down, not as fast as we’d like to see. But as the Christchurch rebuild picks up, as the high commodity prices flow over into the wider community, we would expect that there will be further reductions in unemployment,” English said.
“The big uncertainty is Christchurch, and you’re hearing stories now where employers kept people on for a month after the earthquake and are now putting them off. So there could be a spike in unemployment before the rebuild effort kicks in," he said
"But there’s no doubt that as the rebuilding picks up, there’s going to be strong demand for people.”
Government would hope to be making some progress on the rebuild effort by mid-year, “certainly by the end of the year it should be in full swing,” English said.
In a press release this morning, English said the figures showed the economy was subdued in the second half of 2010.
“They reflect slower domestic growth as New Zealanders increased their savings and paid down debt, as well as the significant impact of the first Canterbury earthquake,” English said.
“The economy is making the adjustment it needs to – away from excessive borrowing and housing speculation and towards more savings and debt repayment. It’s important the Government plays its part in this rebalancing by getting its own finances in order and returning to Budget surplus," he said.
“In the short term, this is constraining growth, particularly in domestic sectors like housing and retailing. But looking ahead, there are reasons to be optimistic about growth picking up later this year – despite the devastation and considerable disruption of the second earthquake in Christchurch last month."
English said New Zealand’s commodity export prices remained around record levels, interest rates and inflation were relatively low, the rebuilding of Christchurch would provide a boost to the regional and national economy, and the Rugby World Cup would attract tens of thousands of visitors.
Meanwhile, English's opposite number, Labour Finance Spokesman David Cunliffe, said the "near-zero" gdp figures for the quarter proved how badly the New Zealand economy was stuck in a rut.
“Treasury and the Reserve Bank both forecast zero growth. Today’s figures are within a shade of that, and are still subject to revision. The bigger picture clearly is that the economy is going nowhere because the National Government has no plan," Cunliffe said.
“Wholesale trade is down, retail is down, accommodation and restaurants are down, confirming the message that businesses in New Zealand towns and cities have been giving us - that for them 2010 was even worse than 2009,” he said.
“Goods and services purchased by Kiwi households are flat even though they faced steep price rises of 2.3 percent in the December quarter alone. This confirms that Kiwi families are being hard hit by the rising cost of living and are having to tighten their belts month by month.
“There’s no good news on the external side either. Imports rose faster than exports, and the fastest-rising export, raw logs, effectively represents exporting Kiwi processing jobs along with the timber," Cunliffe said.
“Many Kiwi families and firms are borrowing more than ever before just to stay afloat, and the Reserve Bank says this will continue until 2013. National’s recession cannot be glibly dismissed as ‘rebalancing’," he said.
“Bill English is presiding over an old-fashioned slump, and clearly has no idea what to do about it. Last week he wanted to put the whole cost of the earthquake on the country’s credit card, but Prime Minister John Key rolled him a few days later when announcing a zero budget this year.
“Economics 101 says that budget cuts in the middle of a deep recession will only put more people out of work, undermine confidence, reduce demand and drive down tax flows. This isn’t a plan. It’s a recipe for continuing economic failure,” Cunliffe said.
Green Party co-leader Russel Norman used the results to plug his party's calls for a temporary earthquake levy to pay for the February 22 quake:
The Government hads raised the risk of a credit downgrade by borrowing to pay for the Christchurch earthquake rather than raising a levy, the Green Party said today.
“John Key’s strategy of borrowing to pay for the rebuilding Christchurch exposes New Zealand to a higher risk of a credit downgrade,” said Green Party Co-Leader Russel Norman.
“A credit downgrade would lead to higher interest rates and that’s about the last thing our fragile economy needs right now.
“The alternative approach to funding the rebuild — raising a temporary levy on income — would reduce the risks of a credit downgrade, because it’s fiscally more responsible.
Dr Norman was responding to figures out today showing economic growth for the December quarter was particularly weak at 0.2 per cent.
“The possibility of a credit downgrade due to increased pressure on the Government’s books from borrowing is real,” said Dr Norman.
“Treasury have advised that any downgrade would add a further 30 to 100 basis points to interest rates. All those with mortgages will have to pay higher interest payments to service their debt — money that will flow to offshore lenders.
“A levy would reduce the upward risk to interest rates and directly fund the rebuilding of Christchurch.”
To date, John Key has rejected the Green Party’s levy proposal, claiming an additional small tax on higher income earners would suppress demand in the economy.
“John Key has rejected the levy proposal on weak economic grounds. A recent NZIER report has shown that those on higher incomes are saving not spending right now. A small temporary levy wouldn’t affect economic activity,” said Dr Norman.
“New Zealanders have indicated they are prepared to fund a levy as the fairest way to share the costs of the earthquake. Ignoring this option in favour of more debt is the high risk way to pay for an earthquake.”
ASB economist Jane Turner said despite the economy dodging a mild technical recession in the second half of 2010, the pace of growth was very underwhelming as the economy tracked sideways. ASB is expecting a small decline in GDP for the current quarter due to the disruption caused to economic activity by the February 22 earthquake.
Looking ahead, Q1 economic activity has been disrupted by the February earthquake: we have pencilled in a small decline in GDP for the quarter, in contrast to a sharp lift prior to the latest earthquake. Beyond that, growth over the first half of the year is likely to be subdued. Reconstruction in Christchurch is likely to be put on hold until the end of this year. In addition, households remain very cautious (as highlighted by the recent drop in consumer confidence), which we expect will to weigh on retail spending and the housing market in the short term.
Nonetheless, the 50 basis point OCR should help bring some relief to stretched households and businesses, and we expect a recovery in confidence and underlying demand over the second half of 2011. Adding to momentum will be additional tourism activity on the back of the Rugby World Cup, while very strong commodity export earnings (particularly dairy) will help buoy confidence and activity in the agricultural sector.
One caution with the Q1 GDP release is that compiling the figures will be a challenge for Statistics NZ – reflecting the extreme disruption and dislocation businesses in Christchurch have suffered.
Today’s rather backward-looking release confirmed that the economy was flat over the earthquake-affect second half of last year. The starting position for 2011, prior to the February earthquake, was weak.
But the rebuilding of Christchurch, along with the Rugby World Cup, will see strong growth rates appearing in the second half of this year. The concentrated reconstruction impetus is simply about restoring the country’s physical state to its former glory, made necessary by the earthquake. Nevertheless, it will give the Canterbury economy a needed injection. And the export environment remains very supportive.
The underlying momentum in the wider economy should gradually improve over the course of the year, and ‘gradual’ translates into the RBNZ being comfortable keeping the RBNZ on hold until early next year. At that point, it will start focussing on the inflation pressures kicked up by the bow wave of construction activity.
The NZD showed a small positive reaction to the better than expected GDP outcome, lifting 0.25c against the USD and AUD in the minutes following the release. However, the NZD still remains below the highs recorded on both the AUD and USD over the past 48 hours. NZD is trading around 0.743 against the USD and 0.733 against the AUD at 11am. The interest rate response was small, with a mild uptick in yield of 1-2 basis points.
JP Morgan economist Helen Kevans said as a result of the most recent quake, their preliminary forecast was for the economy to have contracted again this current quarter by 0.5%, despite having skirted another technical recession in the latter half of 2010:
The February earthquake in Christchurch, New Zealand’s second largest city, led to the loss of lives, and caused substantial damage to property and buildings and immense disruption to business activity. But even before the February earthquake, the economy had underperformed, as indicated by the data today; hence helping to justify the RBNZ’s March 10 decision to cut the OCR 50bp to a record low 2.5%.
At the time of the OCR decision, the RBNZ regarded the move as an “insurance measure” to help mitigate against the negative impact of the recent tremor. The RBNZ also made clear that it will not remove the current policy accommodation in place until there is clear evidence that the reconstruction phase is underway, which probably will be a 2012 story; hence, our forecast is for the next rate hike to be delivered in 2Q12.
(Updated with video, further comments from English, Green Party comment, JP Morgan reaction, Cunliffe comment, ASB reaction, interactive economic growth chart below, reaction from Bill English above)