Double-dip fears realised in GDP figures

Economic activity declined in the September quarter, confirming fears of a double-dip recession.

It is the first contraction in economic activity since the recession ended in March 2009 and much lower than the Reserve Bank’s estimate of 0.3% growth.

Statistics New Zealand says gross domestic product (GDP) declined 0.2% in the September quarter, due to weakness in the primary and goods-producing industries.

"However, annual GDP rose 1.4% compared with the year ended September 2010," national accounts manager Rachael Milicich said.

The main contributors to the decline were:

• manufacturing, down 1.7%, following a 4.3% decline in the previous quarter;

• fishing, forestry, and mining, down 5.5%, mainly due to lower mining activity; and

• construction, down 2.5%, with declines in both residential and non-residential building.

Partly offsetting these declines were increases in transport and communications (up 2.1%), and wholesale trade (up 2.4%).

Citigroup says with a further downgrade to GDP growth estimates likely in March, inflation pressures will remain subdued.

“The only sure signs of increased economic activity are likely from the rebuilding efforts around the Christchurch region following the earthquake,” it says.

This means the Reserve Bank is not likely to consider any increase in the official cash rate of 3% until at least June 2011.

Economists' reaction: Temporary setback
ASB chief economist Nick Tuffley said much of the economic weakness was temporary, and he expected manufacturing and housing construction to recover over the next year.

"However, some challenges will remain, particularly as adverse weather conditions continue to hamper agricultural activity," he said.

"Nonetheless, business confidence has recovered and there were signs of life within the detail of the GDP report that suggest underlying demand is not quite as weak as the headlines imply.

"Strength in capital imports pointed to an increase in business investment on the horizon, he said.

Statistics NZ had not tried to estimate the impact on economic activity of the early September Canterbury earthquake, which would be hard to do. ASB's rough estimate was of a 0.2 percentage point hit, suggesting that at best the economy would have been flat even without the disaster.

ANZ economists Mark Smith and Steve Edwards said the subdued pace of activity following the recession of 2008 and early 2009 was in marked contrast to most other cyclical recoveries the economy had experienced in the past few decades.

"Since emerging from recession, growth has been anaemic and not of the above-trend variety normally expected from typical cyclical rebounds," the ANZ economists said.

"Accommodative monetary policy and high commodity prices are helping, but the headwinds of a strong NZD/USD currency, the move to contractionary fiscal policy, a dead housing market, adverse weather and ongoing debt reduction will continue to have the upper hand in the short term."

They expected 2011 to be a year of "grumpy growth" focused on the second half.

"The more the economy undertakes the necessary adjustment now, the sooner it will set the stage for a more robust and sustainable recovery. The Rugby World Cup and reconstruction of Canterbury will assist growth next year as well, but these appear to be a later in 2011 story."

Goldman Sachs economist Philip Borkin said the economic recovery had been disappointing and fragile as structural factors continued to dominate cyclical support.

"Looking forward to 2011, we continue to feel it will be a better year than 2010. For one, the lower level of activity to begin with makes it easier to get better growth numbers."

Along with support from Canterbury reconstruction and to a lesser degree the Rugby World Cup, the private sector had been deleveraging aggressively and businesses were in a better position and should begin to put cash and better balance sheets to work.

"But structural issues have not disappeared and so while the economy will grow, it will be at a disappointing pace relative to previous recoveries," Mr Borkin said.

Finance minister's comment
Bill English said building faster growth would take some time.

“New Zealand’s economic imbalances have built up over more than a decade – exacerbated by the global recession – and so it will take us more than a year or two to fix them,” he said.

“Unemployment has peaked and is coming down – although not as fast as we would like. However, we are enjoying strong export prices and we’re hosting the Rugby World Cup next year, which will be good for the economy.

“It’s important that we look through the quarter to quarter figures and focus on our long-term challenge, which is building a sustainable recovery built on savings and exports rather than borrowing and consumption.”