Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Path to growth hits swampy spot

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Official cash rate is low and Canterbury rebuild will keep economy on moderate trajectory, says economist.

Growth was largely confined to the construction sector, where activity increased 4.5 per cent. Photo / Mark Mitchell
Growth was largely confined to the construction sector, where activity increased 4.5 per cent. Photo / Mark Mitchell

The economy has a soggier soft patch to pull out of next year after September quarter gross domestic product came in below market expectations and the statisticians revised down growth in the first half of the year.

Economic activity grew 0.2 per cent in the September quarter, following 0.3 per cent in June (revised down from 0.6 per cent reported three months ago) and 0.9 per cent in March (previously 1 per cent).

It reduced annual growth to 2 per cent, the slowest pace for a year.

The market consensus for the quarter had been 0.5 per cent and the New Zealand dollar fell around 30 points to US83.4c.

"This will quickly get lost in the wash as attention returns to the global scene," said ANZ chief economist Cameron Bagrie.

Growth was largely confined to the construction sector, where activity increased 4.5 per cent, reflecting both rebuilding in Christchurch and residential work in Auckland.

Partly offsetting those increases was a decline in heavy and civil engineering, which includes infrastructure such as roads and bridges, after a large rise in the previous quarter.

Activity in the electricity, gas, water and waste services sector rose 4.4 per cent owing to an increase in hydroelectric generation - because the fuel is free more value is added than if gas is burned.

Apart from that, growth was scarce. The services sector - 65 per cent of the economy - was flat overall, with bankers and healthcare workers busier but retail, wholesale and transport down.

Agricultural production fell (from bumper levels), as did forestry and mining.

Manufacturing reversed the previous quarter's rise, driven by falls in metal product manufacturing and food processing.

On the expenditure side, domestic demand contracted as household consumption and government expenditure were flat and a rise in building investment was not enough to compensate for an 18 per cent plunge in business investment in plant and machinery.

"We are not jumping to conclusions over softness in the September quarter," Bagrie said.

"The early part of the year looked overcooked and we've seen some payback."

More timely partial indicators, including ANZ's Truckometer based on traffic volumes, suggest the December quarter has been better.

"The official cash rate remains low and the Canterbury rebuild is picking up, which will keep the economy on a moderate growth trajectory," Bagrie said.

"Our forward-looking gauges suggest annual growth of around 2.5 per cent over the first half of 2013."

Deutsche Bank chief economist Darren Gibbs said the relatively slow growth now reported tied in much better with the observed sluggishness of the labour market and downward drift in inflation.

"At this point, with the economy still operating below trend and inflation very subdued, [Reserve Bank] policy tightening remains a very distant prospect."


Recession was longer and deeper

That really was a brute of a recession, and it had a pup.

Revisions to historical gross domestic product figures released by Statistics New Zealand yesterday showed that the 2008-09 recession was longer (six straight quarters of contraction) and deeper (a peak-to-trough decline of 3.6 per cent) than previously recorded.

There was also a double dip, with two successive quarters of contraction in the second half of 2010.

Economic output did not return to December 2007 levels until the September quarter last year.

In per capita terms it is still 2 per cent lower.

The revisions stretch further back than the global financial crisis, however, and the cumulative effect is that the level of GDP is now thought to be 3 per cent higher than before the revisions.

"The Reserve Bank is likely to look through these changes as they have limited implications for its assessment of the starting point for capacity pressures and hence monetary policy settings," said ANZ economist Mark Smith.

- NZ Herald

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