Rate cut done deal, experts say

The drought’s effect on milk production was one of the factors dragging output down. Photo / Mark Mitchell

GDP figure spells more OCR easing.

A second interest rate cut by the Reserve Bank next month is now a done deal, economists believe, and a third is increasingly on the cards before the year is out, after the economy recorded its weakest quarterly growth for two years.

Gross domestic product grew 0.2 per cent in the March quarter, when the market consensus and central bank expected 0.6 per cent. Annual average growth slowed to 3.2 per cent from 3.3 per cent in December.

With population growth running strong, underpinned by net immigration, aggregate measures of GDP paint a more flattering picture than per capita ones. Output per capita shrank 0.4 per cent in the March quarter and grew 1.5 per cent on an annual average basis, steady on its pace during the three previous years.

Economic output in the March quarter was 2.6 per cent higher than in the March quarter last year, but employment was 3.2 per cent higher. That implied abysmal labour productivity, said Deutsche Bank chief economist Darren Gibbs.

While one of the factors dragging output down - the drought's effect on milk production - was temporary, so was one of the offsetting boosts - the surge in tourism associated with the Cricket World Cup.

If low oil prices were behind a 7.8 per cent decline in mining, they also boosted household spending power and retail sales. In any case, oil prices have rebounded significantly since their trough in January.

Looking through these temporary influences, ASB economists, whose bottom-of-the-range forecast was on the money, still see underlying growth running around 0.7 per cent a quarter, albeit with some downside risks to the outlook. "Growth should remain supported by low interest rates, rising disposable labour incomes and investment demand," said ASB economist Jane Turner.

When the Reserve Bank cut the official cash rate last week it signalled another to come, whose timing would depend on the economic data. "We now expect this rate cut to come in July rather than September," Turner said, given the Reserve Bank's concerns about a weakening outlook for national income as terms of trade fall.

ANZ economist Mark Smith sees only a small likelihood GDP will rebound sharply in the June quarter.

"This will mean even less pressure on capacity at a time inflation is already low," Smith said. The March data strongly reinforced ANZ's call for a follow-up OCR cut in July.

"And we now expect a third rate cut before the end of the year."

Westpac economist Michael Gordon said the March figures sealed the deal for a July cut.

"And it won't stop there. We also expect the Reserve Bank to cut a third time to 2.75 per cent in September and to maintain a bias towards further easing. An economy falling this far short of its potential growth raises the risk that inflation will continue to undershoot the 2 per cent target, in the absence of easier monetary conditions," Gordon said.

Gibbs, who was already calling a July cut, said the question was now whether the Reserve Bank would completely reverse the 100 basis points of tightening that occurred last year. Gibbs said: "We certainly see a case for doing so and think it is fair for the market to price close to a 50:50 prospect."

Weak growth
• Gross domestic product grew 0.2% in the March quarter.
• Market consensus and the central bank had expected 0.6%.
• Annual average growth slowed to 3.2% from 3.3% in December.
• Output per capita shrank 0.4% in the March quarter.

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