Forecasts fail as NZ economy hits wall

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The recovery ground to a halt in the middle part of the year, official figures show.

The economy contracted by 0.2 per cent in the September quarter, Statistics New Zealand said, and it revised the June quarter's growth down to just 0.1 per cent.

It means that economic activity in the September quarter was still 1.7 per cent below its peak in December 2007 and 4.6 per cent lower in per capita terms.

The result was much weaker than the markets or Reserve Bank were expecting. The consensus forecast had been for an increase of 0.2 per cent, and the Reserve Bank was looking for growth of 0.3 per cent.

The significantly weaker starting point implies inflationary bottlenecks are even further away and more economists are now picking it will be September next year before the Reserve Bank raises the official cash rate again.

Statistics New Zealand said the Canterbury earthquake's effects could not be separately quantified.

"Our rough estimate of the earthquake's impact was a 0.2 percentage point hit; the Reserve Bank's was 0.1 percentage points," ASB economist Jane Turner said.

"At best the economy would have been flat even without the disaster."

The weakness was widespread. Agricultural output fell 1 per cent, as snow storms in the far south hit livestock production.

Mining activity fell 6.9 per cent with both production and exploration down, while forestry rose 0.6 per cent.

But the largest contributor to the decline was manufacturing, which declined 1.7 per cent to be 15 per cent off its pre-recession level in December 2007.

Construction activity fell 2.5 per cent. That only partially reverses the June quarter's 5.6 per cent rise but it still leaves activity 16 per cent below its pre-recession peak three years ago.

The services sector expanded 0.3 per cent led by rises of 3.4 per cent in transport and 2.4 per cent in wholesale trade.

There were some signs that underlying demand might not be quite as weak as the figures suggested, Turner said.

Spending on plant and machinery rose 6.4 per cent and the even stronger growth in imports of capital goods (nearly 20 per cent) in the quarter pointed to more business investment in the December quarter.

Westpac economist Dominick Stephens said firms were beginning to invest, but clearly with an eye to future rather than present demand.

"Despite the weak historical numbers, we still think there is every reason to expect a stronger performance in 2011. The housing market is showing signs of stabilisation thanks to lower interest rates and healthier net migration. This should improve the consumer mood next year, although it'll be no party," he said.

In addition next year would see substantial earthquake reconstruction activity and the Rugby World Cup.

And the terms of trade - relative prices for what we export as against what we import - have been going from strength to strength.

"This basically means New Zealand Inc has had a national pay rise, which should eventually perk the economy up," Stephens said.

Goldman Sachs economist Philip Borkin said the possibility of a further contraction in the December quarter could not be ruled out, though he is not forecasting one.

"Dry weather conditions over much of the quarter will have hampered milk production - although recent rains are most welcome - and Canterbury earthquake reconstruction work is unlikely to really ramp up until next year," he said.

Data for December from Paymark, which processes a large proportion of eftpos transactions, showed the key Christmas shopping period had been disappointing.

Labour's finance spokesman David Cunliffe said it was clear that "unaffordable and misdirected" tax cuts had done little to simulate the economy and the Government was missing in action when it came to micro-economic initiatives.

But Finance Minister Bill English said: "I've said all along that this recovery would be a bit bumpy at times, and that's proved to be the case."

SIGNS OF LIFE

2011 could be a better year because of:

* Continuing favourable terms of trade.

* Earthquake reconstruction stimulus.

* Rugby World Cup spending by visitors.

WHAT THE ECONOMISTS SAY

Despite the weak historical numbers, we still think there is every reason to expect a stronger performance in 2011.
Dominick Stephens, Westpac

We still see better prospects but this is very much a second half of 2011 story.
Mark Smith, ANZ

[It] will add to an already very subdued economic outlook and will see the RBNZ in no hurry to lift the OCR before June 2011.
Jane Turner, ASB

While the data is historical, this will cement the RBNZ on the sidelines for much of 2011.
Philip Borkin, Goldman Sachs