New Zealand’s Recession Probably Extended Into a Third Quarter

By Tracy Withers

Dec. 22 (Bloomberg) -- New Zealand’s recession probably extended into a third quarter as consumers and businesses reined in spending and exports of milk, timber and wool eased.

Gross domestic product shrank 0.5 percent last quarter from the previous three months, prolonging the nation’s first recession since 1998, according to the median estimate of 13 economists surveyed by Bloomberg. The GDP report is released tomorrow at 10:45 a.m. in Wellington.

A deepening slump may force central bank Governor Alan Bollard to further reduce interest rates in January to revive domestic demand. Prime Minister John Key’s government, which won a Nov. 8 election on a pledge to cut income taxes by NZ$4.4 billion ($2.6 billion) from April, said last week there’s a risk the economy may not begin expanding again until 2010.

“The Reserve Bank will be surprised by ongoing weakness in the economy into 2009,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “Despite substantial government and central back action, global credit markets remain disrupted and the economic outlook continues to deteriorate.”

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.

Consumer Slowdown

The economy contracted 0.3 percent in the first quarter and declined 0.2 percent in the second quarter as record-high borrowing costs stalled the housing market and a drought crimped farm production. Though the drought has ended and borrowing costs have declined, fallout from the global economic crisis has prolonged New Zealand’s recession.

Warehouse Group Ltd. and Michael Hill International Ltd. are among retailers that have reported sales declines. Air New Zealand Ltd. said it plans to fire workers and cookie maker Griffin’s Foods Ltd. last week closed a factory in Wellington.

“There are compelling arguments for a much lower cash rate in New Zealand,” said Su-Lin Ong, senior economist at RBC Capital Markets in Sydney. “New Zealand was already on the back foot as the global credit crisis intensified and its recession is likely to continue for much of 2009.”

Bollard has reduced the Reserve Bank of New Zealand’s official cash rate by 3.25 percentage points since July to a nine-year low of 5 percent. The governor said this month the economy faces a “shallow recovery” in the first half of 2009.

Rate Forecasts

Seven of 14 economists surveyed predict a half-point rate reduction to 4.5 percent on Jan. 29. Three expect three-quarters of a point cut and four tip a one percentage point move.

RBC Capital Market’s Ong forecasts the central bank will lower rates at each of the next four policy meetings, which will push down the benchmark to 3 percent by mid-2009.

The jobless rate rose to a five-year high of 4.2 percent last quarter, and the government forecasts it will climb to 6.5 percent by mid-2010. ANZ National Ltd’s poll of business confidence slumped in December to the lowest level since the series began in 1988.

New Zealand’s retail sales slipped 0.9 percent last quarter, the third straight decrease. The number of homes sold tumbled to a 26-year low in August.

Warehouse Group, New Zealand’s biggest discount retailer, reported a 2.1 percent drop in sales in the quarter ended Oct. 26. Sales at Michael Hill, the nation’s largest specialty jewelry retailer, declined 3.7 percent in the three months ended Sept. 30.

Construction fell 2.1 percent from the second quarter, the third consecutive drop, because fewer homes were built.

Exports slid 2.3 percent in the third quarter. Dairy shipments, the nation’s largest export, slid 4.3 percent.

Manufacturing slumped to the lowest level in five years in the three months through September.

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