Recession over as NZ GDP grows by 0.1% in June quarter on Chinese log exports; NZ$ over 73 USc (Update 2)

New Zealand's Gross Domestic Product (GDP) grew by 0.1% in the June quarter from March, marking a technical end to a recession that began at the start of 2008, figures released today by Statistics New Zealand show. The growth followed a revised 0.8% contraction in the March quarter (revised from 1% contraction). (Update 1 with economist reaction.) The New Zealand dollar jumped on the news, from below 72 US cents, briefly breaking the 73 US cent mark before falling away slightly. Exports of goods and services showed their biggest quarterly increase since the December 2006 quarter, on the back of stronger log and dairy exports. Import volumes fell for the fourth consecutive quarter. Economist expectations had been around a 0.1% to 0.2% contraction in the June quarter from March, although ASB economists had picked a 0.1% increase. Stats NZ said activity in the primary industries was up 1.5% in the June 2009 quarter, mainly driven by forestry and logging (up 8.0%). "The increase in forestry and logging production was related to an increase in exports of logs to the People's Republic of China," Stats NZ said.

"Activity in the goods-producing industries contracted 0.5 percent in the June 2009 quarter. The manufacturing (down 1.3 percent) and construction (down 1.9 percent) industries both declined. A 5.9 percent increase in electricity, gas and water partly offset these declines," it said. "Activity in the services industries was flat this quarter. Service industries that increased were real estate and business services (up 1.5 percent) and communications (up 1.7 percent). Offsetting these increases were declines in wholesale trade (down 2.1 percent), transport and storage (down 3.3 percent), and government administration and defence (down 0.4 percent)." Stats NZ said the increase in real estate and business services was driven by increased house sales and more hours worked in the business services industries. "The expenditure measure of GDP, released concurrently with the production measure, was up 0.4 percent in the June 2009 quarter. Household consumption expenditure, which measures the volume of spending by New Zealand households, was up 0.4 percent. This increase in household spending was driven by non-durables (mainly motor fuel) and services. Household spending on durable items fell." Meanwhile, general government expenditure fell 1% from the March quarter, the first quarter on quarter fall since the 2004 June quarter. "Export volumes were up 4.7 percent in the June 2009 quarter, with exports of dairy and wood products the main contributors. Import volumes decreased 3.8 percent in the same period, with the largest declines in intermediate goods, and machinery and plant equipment. The combination of higher exports, lower imports, and a decline in manufacturing led to a large, $1.1 billion run down in inventories." In the year to June 2009, GDP was down 1.8% compared to the year to June 2008. Economist reaction ASB economist Jane Turner said the result on balance suggested slightly more underlying strength in the economy than ASB had expected. ASB had picked a 0.1% increase in GDP over the quarter. "Most expenditure components printed stronger than we had expected, with the weakness loaded in government spending (down 1.0%) and stocks (a 2.3% percentage point drag on the overall result)," Turner said.

Pockets of weakness in the economy remain, including exports of services which fell 2.6%, including a 1.6% decline in the volume of tourist spending. Government spending fell 1%, with decline in spending on education the main contributor. Also contributing to the weakness in GDP was a sharp run down in stocks ($1.1 billion fall), particularly in the manufacturing sector. Stats NZ noted there was a large run down in inventories of export goods "“ we presume this was stocks of dairy product (as there was a 21% surge in dairy exports in Q2 not matched by increased production). Back in black in the growth stakes - for now at least. The economy has ended a 2.9% contraction. The underlying detail looked more robust than the headline itself implies, which is also encouraging. However, timing could be partly behind the return to positive growth. Underlying indicators such as business confidence suggested the quarter should be a bit weaker than our positive GDP component forecast did, but indicated more of a lift for Q3. But before anybody starts popping champagne corks and declaring the recession is officially over, it is worth remembering that the growth we expect in the second half of the year is still very weak and "“ like in Q2 "“ just a margin of error between slight expansion or contraction. It is better to think of the economy has having begun stabilising rather than rebounding. The recovery is going to remain fragile in the initial stages, business profitability will remain under pressure, and unemployment will continue to rise further. It is within the realm of possibility that another negative quarter gets recorded at some stage over the next year. The RBNZ's Monetary Policy Statement had a Q2 forecast of -0.1% qoq. Coupled with Q1 being revised up slightly, the economy hasn't shrunk quite as much as the RBNZ's forecasts assumed. The RBNZ had a sharp pick-up starting at the end of the year; in contrast the recovery is likely to be starting earlier but be more gradual. We continue to expect the RBNZ will lift the OCR in June next year, as opposed to the late 2010 implied by the RBNZ's published interest rate outlook.