GDP grew 0.2% in September quarter, less than expected; NZ$ dips to 69 USc (Update 2)

New Zealand GDP rose 0.2% in the September quarter from the June quarter, which was less than the 0.3-0.4% that most economists had expected. Growth in the June quarter was revised up to 0.2% from 0.1%, which suggests the New Zealand economy has emerged from the recession, but only just. (Update 2 includes My view below) The New Zealand dollar immediately fell to 69.9 USc from 70.3 USc prior to the release of the data, which suggests the Reserve Bank may be slightly slower to hike the OCR next year than previously expected. This would make the New Zealand dollar less attractive relative to other currencies. Here is more detail from Stats NZ below. We will update this article with more info and reaction through the morning.

Economic activity, as measured by gross domestic product (GDP), was up 0.2 percent in the September 2009 quarter, Statistics New Zealand said today. This follows a 0.2 percent increase in the June 2009 quarter. These small increases in economic activity follow five quarters of contraction in the New Zealand economy. In level terms, economic activity during the September 2009 quarter was 2.9 percent lower than in the December 2007 quarter when economic activity last peaked. "The economy continued to grow slowly in the September 2009 quarter, and the picture across industries was mixed," said National Accounts manager Rachael Milicich. "On the production side of the economy, mining and business services showed the largest increases." By industry, the largest movements were:

• Real estate and business services, up 2.2 percent, driven by business services
• Mining activity, up 11.1 percent, driven by an increase in both extraction (mainly offshore oil production), and exploration (as measured by metres drilled)
• Manufacturing activity, down 1.9 percent, and now back to the June 1999 quarter level
• Construction activity, down 4.4 percent, the sixth decrease in the last seven quarters.

The expenditure measure of GDP, which is released concurrently with the production measure and is conceptually the same, was also up 0.2 percent in the September 2009 quarter. The production measure of GDP shows the volume of goods and services produced during the period, while the expenditure measure of GDP shows how those goods and services were used. The volume of spending by New Zealand households was up 0.8 percent in the September 2009 quarter. Spending on durable goods (big-ticket items such as furniture, appliances, and cars) was up 2.0 percent, and spending on services also increased. Household spending on non-durables (which includes alcohol and food) fell 0.8 percent. Investment in fixed assets, measured by gross fixed capital formation, was down 1.8 percent in the September 2009 quarter. The largest contributors to the decline were plant, machinery, and equipment investment (down 8.0 percent), other construction, which includes roads and bridges (down 9.3 percent), and residential building (down 5.0 percent).

My view: 2009 was the year we learnt nothing and changed nothing. We still have an unbalanced economy where activity is dominated by the housing market, consumer spending driven by the housing market, and where business investment is weak. Investment in the high value-added exports, manufacturing and technology that will boost productivity and real wages is languishing. Yet many people think everything is fine and dandy. We are making the same mistakes all over again. We are investing in housing because it has a massive tax break and we don't trust other types of investment. Baby-boomer landlords are condemning their children and grandchildren to low wages, unaffordable housing and eventually migration because they can't see past the end of their own noses and the equity built up in their brick and tile nest eggs. The detail in these figures show just how unchanged we are and gives a hint of where we're heading. Here's the proof:

• Household consumption rose 0.8% in the September quarter from the June quarter while gross fixed capital formation fell 1.8%. (We consume more but invest less in the machines to produce more)
• Household consumption on durable goods such as cars, furniture and appliances (which are mostly imported) rose 2.0% in the quarter (We consume more imported goods and borrow more from overseas to pay for them because we produce less ourselves and own less of the assets here that do produce things)
• Investment in plant, machinery and equipment fell 8.0% in the September quarter (Right at the moment we should be investing in gear to improve productivity we sit on our arses buying more iPods and two bedroom rentals)
• Goods producing industries fell 2.8% in the quarter and are now down 14% since the December 2007 quarter when the recession began (yet we think the New Zealand economy is recovering strongly)
• Service industry output (where real wages are lower) rose 0.4% in the quarter, with activity biased towards finance, insurance and business services (which include real estate), where output rose 2.2% in the quarter. (Do we really all want to be real estate agents, mortgage brokers and insurance agents?)
• Manufacturing fell 1.9% and is now back to the levels last seen in June 1999 (We have great ideas, great raw materials and great marketing skills yet we lack the investment nous or capital to turn these ideas and raw materials into high value-added exports)

The Reserve Bank's concerns that the recovery will be unbalanced are being borne out and the pressure remains on the government to change our tax system to help rebalance the economy. If they don't, all those baby-boomer landlords will be sitting around in 20 years wondering why they have to jump on a plane to visit their grandkids. Do we want to become a nation of landlords or a nation of entrepreneurs and business people creating real jobs with real(ly high) wages? John Key will give us his answer in the 2010 budget in May when he has an opportunity to take up recommendations likely from the Tax Working Group to impose a land tax, to equalise income taxes and to remove various tax breaks for property investors. If he doesn't, he will prove himself to be a weak politician unwilling to challenge his blue rinse base that has his head stuck in the sand with the rest of the generation that voted him in. If he does, John Key may prove himself to be the visionary that turned around the New Zealand economy and convinced on his own supporters to think of their children instead of themselves. Your view? I welcome your thoughts and insights in the comments below.