NZ GDP falls 1% in March quarter; 5th negative quarter in a row (Update 6)

New Zealand's economy contracted for the fifth consecutive quarter in the March quarter as Gross Domestic Product (GDP) fell 1% from December and was down 2.7% from the same quarter a year ago, figures released by Statistics New Zealand (Stats NZ) show. (Update 6 includes comments and Youtube video from Finance Minister Bill English). The data shows the economy mired in a deep recession that may not abate until late 2009 or early 2010. The construction and manufacturing sectors are still contracting (from the March quarter last year) and the only major contributors to growth are coming from government and financial services. The export sector is struggling with a resurgent NZ dollar and the retail sector's contribution is still negative. The figures suggest the Reserve Bank will be able to stick to its promise to keep the Official Cash Rate at or below 2.5% until late next year. The median economist expectation had been for a 0.7% contraction during the quarter and a 2.3% contraction over the year. The quarterly contraction was in line with the Reserve Bank of New Zealand's forecast. "The main contributor to the decline this quarter was manufacturing activity, which fell 7.2%," Government Statistician Geoff Bascand said.

"Nearly all manufacturing sub-industries decreased this quarter, with the food, beverage, and tobacco; machinery and equipment; and metal product sub-industries recording the largest falls," Bascand said. "Construction activity was up 0.4% this quarter, following four quarters of contraction. Non-residential building activity fell, but this was offset by a rise in other construction activity. Other construction includes work on projects that are not buildings, such as roads, bridges, railway track maintenance, and power plants. Partly offsetting the decreases in GDP in the latest quarter was an increase in real estate and business services, which rose 3.2%," he said. The March quarter contraction followed a revised 1% fall in GDP in the December quarter (previously a 0.9% contraction); a revised 0.5% fall in September (from a 0.4% contraction); a 0.2% fall in June, and a 0.3% fall in the March quarter last year. In the full year to March 2009, GDP fell 1% compared to the full year to March 2008. This was the biggest decline in annual activity since the year ended March 1992, when the economy contracted by 1.3%, Bascand said. "For the year ended March 2009, activity in goods-producing industries decreased 5.6%. This is the largest annual decline in the goods-producing industries since the year ended December 1991." The expenditure measure of GDP showed a seasonally adjusted contraction of 2.2% in March from the same quarter a year ago (using 1995/96 prices). Actual figures (95/96 prices) show a 1.7% fall from the March 2008 quarter. Actual private consumption expenditure was down 1.8% to NZ$19.83 billion, its lowest quarterly figure since the June 2006 quarter. Actual general government final consumption expenditure was up 2.7% from March 2008. Following yesterday's Balance of Payment's figures, ANZ National said there was an upside risk to their forecast 1% quarterly contraction in GDP because net exports were stronger than expected. ASB had expected a 0.5% quarterly GDP contraction, with strength in agricultural production and processing masking "the underlying weakness in manufacturing production." BNZ had forecast a 0.7% contraction with upside risks following the net exports figure yesterday, and downside risks following the latest QSBO. Westpac had forecast a 0.9% contraction with upside risks. ASB economist Jane Turner said the key surprise for them was the weakness in manufacturing, "despite the surprisingly resilient Q1 manufacturing survey released earlier this month."

Indicators such as the manufacturing survey suggested the underlying momentum in GDP was weaker than our 0.5% forecast: we had expected some temporary strength in pastoral processing to hold Q1 up at the expense of a deeper contraction in Q2. Those factors didn't appear in the GDP accounts: as a result we will be revising our Q2 GDP forecast up from a 0.9% contraction. The 1% contraction was bang-on the RBNZ's MPS forecast. Nonetheless, today's GDP result lends us to think underlying momentum in GDP is weaker than previously thought, with the recession spreading through more sectors of the economy more aggressively than expected. The risks to the growth and inflation outlook definitely remain skewed to the downside. For the RBNZ this compounds the already-present risks to its own outlook that stem from its assumption the exchange rate will sit at a very low level for the next couple of years. Although green shoots may be appearing in the housing market, they are conspicuously absent in other sectors. At some stage down the track the RBNZ may want to deliver further monetary stimulus "“ or more correctly try and mitigate the lift in the NZD and long-term interest rates. We continue to have 25 basis point rate cuts penciled in for September and October.

Here are comments from JP Morgan economist Helen Kevans:

We forecast that the economy will contract again in the second and third quarters of 2009, before expanding modestly in 4Q. The significant monetary and fiscal policy easing that has been delivered should help New Zealand eventually recover from this prolonged recession, but growth will remain below trend for some time. Indeed, the forecast recovery will be milder than those experienced after previous recessions, where growth averaged 5%. This time, an extended period of weak investment and household deleveraging will delay to return to trend growth. The main risk to the recovery we forecast to commence later this year is the strengthening NZ dollar. RBNZ Government Bollard recently acknowledged that recent NZD appreciation had added to the broader tightening in financial market conditions. For this reason, it has become even more important that fiscal and monetary policy operate effectively. We believe that if monetary conditions continue to tighten, further monetary policy support will be delivered in 2H09. Indeed, the RBNZ has left the door open to further policy easing, and we maintain our call for a terminal cash rate of 2.25%. We acknowledge, though, the significant possibility that the RBNZ's easing cycle may already have ended.

Here's Bill English's take on the GDP figures in Youtube form below and in his statement.

"Budget 2009 has laid the solid foundations for our recovery, but we have plenty of work ahead of us to reverse these structural imbalances, which are clearly worse than we had envisaged. "That will be our focus over the coming year. We will be pressing ahead with our regulatory reforms, with our multi-billion dollar investment in productive infrastructure, and with providing better, smarter public services."