New Zealand Economy in Recession, May Prompt More Rate Cuts

By Tracy Withers

Sept. 25 (Bloomberg) -- New Zealand's economy probably slumped into its first recession in 10 years in the second quarter, adding pressure on the central bank to cut interest rates to a three-year low next month.

Gross domestic product shrank 0.5 percent in the three months ended June 30 after contracting 0.3 percent in the first quarter, according to the median estimate of 13 economists surveyed by Bloomberg. The GDP report is released tomorrow at 10:45 a.m. in Wellington.

Reserve Bank Governor Alan Bollard has cut the benchmark interest rate by three quarters of a point to 7.5 percent since July to try to kick-start the economy. New Zealand's dollar is the worst performer among 16 major currencies tracked by Bloomberg, falling 14 percent against the U.S. dollar the past six months as traders increased bets on further rate cuts.

``Confirmation of a recession could encourage the market to price in further monetary easing,'' said Doug Steel, senior economist at Westpac Banking Corp. in Wellington. The contraction ``will do little to calm investors' nerves.''

Bollard cut the record-high official cash rate in July by a quarter-point to 8 percent, his first reduction in five years, when most economists expected no change. He followed on Sept. 11 with a half-point cut to 7.5 percent when all but one analyst forecast a quarter-point change.

Nine of 14 economists surveyed by Bloomberg expect another half-point cut at the next review on Oct. 23, taking the benchmark to a three-year low of 7 percent.

Consumer Confidence

Bollard has urged banks to pass on the savings to customers, saying the economy is experiencing a ``marked slowdown led by the household sector.''

The central bank forecast the economy contracted 0.2 percent in the second quarter and will probably slow further in the three months ended Sept. 30.

Consumer confidence fell to a 17-year low in the second quarter as food prices soared, fuel costs reached a record and home-loan interest rates remained at an all-time high.

Retail sales slumped 1.5 percent in the same period, the most in at least 13 years, as consumers had little left to spend on computers or dining out.

``A clear shift in consumer sentiment occurred during this period, which placed significant pressure on retail sales, with margins coming under further pressure as retailers sought to clear seasonal inventories,'' Ian Morrice, chief executive officer at Warehouse Group Ltd., said this month.

Profits Plunge

Auckland-based Warehouse Group, the nation's biggest discount retailer, reported a 52 percent plunge in profit in the six months ended July 27.

When customers stopped visiting his Wellington audio- equipment store, owner Digby Paape cut prices and ran special promotions to boost sales.

``If we didn't have the promotions, floor traffic could have dried up,'' said Paape, who sells Bose Corp. equipment such as the NZ$9,000 ($6,120) Lifestyle 48 home entertainment system. ``With the cost of those systems, our customers are more vulnerable to falls in confidence.''

Record-high borrowing costs also stalled the housing market, while a drought crimped farm production and exports.

Construction fell 5.8 percent from the first quarter as home building slumped for a third consecutive quarter, according to a government report on Sept. 8.

Housing Slump

House prices are falling and home sales tumbled to a 26- year low in August, according to the Real Estate Institute.

Exports fell 3.7 percent from the first quarter when they dropped 3.9 percent as a drought crimped milk production, according to a government report on Sept. 10. Overseas shipments make up one-third of the economy.

Farmers produced 4.3 percent less milk in the year ended June 30, Fonterra Cooperative Group Ltd., the world's largest dairy exporter, said yesterday.

The following are economists' forecasts for the change in the second-quarter gross domestic product from the first quarter and from a year earlier. The table also shows the annual average growth rate:

                                               Annual
                          QoQ%      YoY%      Average
  ----------------------------------------------------
  Median                 -0.5%      0.6%       2.3%
  High Forecast          -0.3%      0.8%       2.3%
  Low Forecast           -0.6%      0.5%       2.3%
  No. of replies          13        13         11
  ----------------------------------------------------
  4Cast                  -0.6%      0.5%       2.3%
  ANZ Bank               -0.5%      0.6%       2.3%
  ASB Bank               -0.3%      0.7%       2.3%
  Bank of New Zealand    -0.4%      0.7%       2.3%
  Barclays               -0.5%      0.5%       ---
  Citibank               -0.4%      0.6%       2.3%
  Deutsche Bank          -0.5%      0.5%       2.3%
  First NZ Capital       -0.5%      0.6%       2.3%
  Goldman Sachs JBWere   -0.3%      0.7%       2.3%
  JPMorgan               -0.3%      0.7%       ---
  Macquarie              -0.6%      0.5%       2.3%
  UBS Warburg            -0.3%      0.8%       2.3%
  Westpac Bank           -0.5%      0.6%       2.3%
=======================================================

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.