New Zealand Economy Shrinks 0.4% as Recession Deepens

By Tracy Withers

Dec. 23 (Bloomberg) -- New Zealand’s economy contracted for the third straight quarter, extending the nation’s first recession in 10 years and adding to the prospect the central bank will cut interest rates to a record low next month.

Gross domestic product declined 0.4 percent in the three months ended Sept. 30 from the second quarter, when it fell 0.2 percent, Statistics New Zealand said today. The median in a Bloomberg survey of 13 economists was for a 0.5 percent drop.

The highest unemployment in five years and a slumping housing market prompted to consumers to cut spending as the global recession reduced demand for exports of milk, timber and meat. Central bank Governor Alan Bollard, who expected a 0.3 percent contraction, is forecast to cut rates next month to the lowest since the nation began using a benchmark in 1999.

“The Reserve Bank has more work to do,” said Su-Lin Ong, a senior economist at RBC Capital Markets in Sydney. “Interest rates remain far too high for a recessionary economy. We expect the benchmark will be cut another 200 basis points by the second quarter.”

The Reserve Bank of New Zealand has slashed the official cash rate by 3.25 percentage points since July to 5 percent.

The economy shrank 0.1 percent from a year earlier, the first annual contraction since the third quarter of 1998.

Household spending, which makes up 60 percent of the economy, fell for a third straight quarter, the worst result in the 21-year history of the series, the statistics bureau said.

New Government

Prime Minister John Key’s government, which won a Nov. 8 election on a pledge to cut income taxes by NZ$4.4 billion ($2.5 billion) from April, said last week there’s a risk the economy may not begin expanding until 2010.

New Zealand’s dollar traded at 57.21 U.S. cents at 11:53 a.m. in Wellington from 57.30 cents before the report was released. The three-year bond yield was unchanged at 4.53 percent. The NZX 50 stock index fell 0.3 percent to 2,671.49.

New Zealand joined Japan, Europe, the U.S. and Singapore in sinking into a recession this year as the global credit crisis buffets consumer and business confidence and cools trade.

The World Bank forecasts international trade will shrink in 2009 for the first time in more than 25 years. Exports account for about 30 percent of New Zealand’s NZ$180 billion economy.

Rising Unemployment

“As the global economy continues to weaken, the risks to the New Zealand economy remain on the downside with a large increase in the unemployment rate now in prospect,” said Stephen Halmarick, co-head of economic and market analysis at Citigroup in Sydney.

Air New Zealand Ltd., which posted a 5.7 percent slump in passengers in November, said it plans to fire workers. Cookie maker Griffin’s Foods Ltd. last week closed a factory in Wellington.

Hallenstein Glasson Holdings Ltd., Warehouse Group Ltd. and Michael Hill International Ltd. are among retailers that have reported sales declines.

“The outlook for 2009 is expected to be difficult,” Hallenstein Chairman Warren Bell told shareholders last week.

Central bank Governor Bollard on Dec. 4 said he expects the economy will grow in the fourth quarter as rate cuts, cheaper fuel and income-tax cuts buoy spending. The bank’s GDP forecasts were prepared before fresh evidence of the slump in the world’s biggest economies.

Interest Rates

“Any scope for a material rebound in growth is surely being quashed by the degree of global recession we’re now staring at,” said Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington.

Seven of 14 economists surveyed by Bloomberg News forecast Bollard will reduce the rate by a half point to 4.5 percent, matching the record low, on Jan. 29. Three tip a three-quarter point cut and four expect one percentage point.

Sales of food and other so-called non-durable goods fell 0.9 percent, today’s report showed. Spending on health, travel and other services also dropped. Spending on new housing slumped 7.7 percent in the third quarter, the fourth straight decline.

New Zealanders cut spending last quarter as the cost of fuel surged to a record high in mid-July. The cost of gasoline has since fallen 35 percent from its peak. As well, 85 percent of New Zealand home loans are fixed so Bollard’s rate cuts haven’t immediately reduced finance costs for most home owners.

Business investment decreased, led by fewer purchases of plant, machinery and transport equipment.

Exports fell 3.1 percent in the quarter as meat, seafood and dairy shipments declined. Import volumes dropped 7.6 percent after one-time gains in the second quarter on capital equipment purchased for the oil industry. Excluding exports and imports, the economy shrank 1.7 percent.

Farm production surged 6 percent in the third quarter amid a recovery from a drought. Manufacturing fell 2.5 percent. Service industries also posted declines led by transport, communications and retailing.

The GDP deflator was 4.7 percent in the year ended Sept. 30.

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