Currency dips as drought throws handbrake on economic growth

The New Zealand dollar dropped after government figures showed the economy grew at the half the expected pace in the first quarter, as the drought at the start of the year saw farmers cull their herds, sapping milk production.

Gross domestic product grew 0.3 percent to $37.1 billion in the three months ended March 31, from a pace of 1.5 percent in the December period, according to Statistics New Zealand.

That is half the 0.6 percent rate predicted in a Reuters survey of economists and below the 0.5 percent pace forecast by the Reserve Bank in its June monetary policy statement published last week.

"It was weaker than expected but that weakness does seem to be more confined to a few pockets," says Nick Tuffley, chief economist at ASB Bank. "There may be some additional negatives from the drought that have held it back. There is more impact from the drought to come through."

The kiwi fell as low as 78.38 US cents from 78.90 cents immediately before the figures were released, and recently traded at 78.71 cents. The trade-weighted index dropped to 73.75 from 73.95 before the release, and is 4.8 percent below the central bank's average projection of 77.5 through the June quarter.

New Zealand's economy grew at annual 2.5 percent, in line with expectations, after upward revisions in the first three quarters of 2012 and activity in the March quarter was 2.4 percent higher than the same period a year earlier.

Mr Tuffley says the weaker quarterly growth is not likely to change the Reserve Bank's outlook, which is for a rate hike next year, with the underlying momentum in the economy building from the construction sector and a growing appetite for consumers to spend.

New Zealand's agriculture, forestry and fishing sector shrank 4.8 percent due to the arid climate conditions in the quarter, trimming 0.3 of a percentage point from GDP.

The Reserve Bank was expecting the drought will trim about half a percentage point from economic growth. Agriculture shrank 4.7 percent, the biggest fall since the June 2010 quarter.

Future production will be affected
Statistics NZ GDP project manager Jason Attewell says the drought will impact on the economy for several quarters as lower herd numbers and conception rates affect future production.

The primary sector grew 6.5 percent on an annual basis, with favourable growing conditions through 2012 before the drought, which stoked dairy production.

Manufacturing grew 0.2 percent in the March quarter, fuelled by a 3 percent gain in food, beverage and tobacco manufacturing due to rising slaughter numbers fuelling meat manufacturing.

Earlier this month, the BNZ-BusinessNZ performance of manufacturing index showed New Zealand manufacturing activity rose in May to the highest level since June 2004, led by improved growth in production, new orders and employment.

Construction helped drive growth in the period, rising 5.5 percent, on the back of residential building and the Canterbury rebuild effort. Investment in residential building climbed 9.6 percent in its seventh quarterly gain and the biggest increase since September 2002.

Information media and telecommunications shrank 3.1 percent in the quarter due to falling call minutes, and are down 1.1 percent annually. Electricity, gas, water and waste services shrank 4.4 percent as declining metal production manufacturing sapped electricity generation.

Service industries grew 0.5 percent in the quarter with strong gains in professional, scientific, technical, administrative and support services, for an annual gain of 17 percent.

The BNZ-BusinessNZ performance of services index showed the sector grew at its fastest pace for a May month since 2007.

The expenditure measure of GDP, which measures the final purchases of locally produced goods and services, grew 0.3 percent in the quarter, and was up 3.1 percent annually.

Household consumption rose 0.4 percent with increased spending on non-durable goods, such as food and non-alcoholic beverages. Spending was up 2.2 percent in the year.

Gross fixed capital formation, which is made up of business investment and residential building investment, rose 0.4 percent in the quarter, bolstered by residential investment activity. Investment in plant, machinery and equipment shrank 6.2 percent. GFCF grew 6.7 percent annually.

Inventories were built up by $340 million in the quarter, having been run down by $78 million in the December period, driven by manufacturing, forestry and logging.

(BusinessDesk)