2.7pc fall in GDP the worst on record

The economy contracted 1 per cent over the first three months of the year, but forecasters expect the numbers to start improving from here.

Coming on top of a revised 1 per cent fall in the December quarter it means gross domestic product has declined 2.7 per cent over the year ended March. That is worse than the previous biggest annual decline since comparable statistics began, recorded in March 1991, and worse than the 2.5 per cent decline in the US economy over the same period.

ANZ National Bank economist Philip Borkin said that whereas last year's recession was mainly due to domestic factors like a housing market correction and drought, the full brunt of the global recession had now been felt, with manufacturing and the rest of the tradeable sector hit hard.

The biggest contributor to the March quarter's decline was a record 7.2 per cent fall in manufacturing, making 13 per cent for the year. None of the nine manufacturing sub-sectors grew. Construction grew 0.4 per cent, all of which was due to infrastructure spending. Building, both residential and commercial, declined.

The services sector overall was flat, as contractions in wholesale, retail, accommodation, transport and communications were offset by increased activity in the government and, particularly, in the financial services sector, mainly related to housing.

On the expenditure side of the national accounts the biggest component, household consumption, shrank 1.4 per cent, its steepest decline since June 1991. That was driven by a 2.5 per cent fall in spending on durable items such as cars, appliances and furniture.

Business investment dropped 7.3 per cent, reflecting both 4.7 per cent less spending on plant and machinery and 37.3 per cent less on transport equipment.

Net exports made a significant positive contribution not because of a slight 0.6 per cent rise in exports so much as a steep 8.6 per cent fall in imports, especially of capital goods but also cars and consumer goods.

"We suspect that the six months to the end of March 2009 was when recessionary forces were at their strongest," Westpac economist Doug Steel said. "There are some signs of demand improving, like the increase in house sales and rise in electronic transactions over recent months. [But] there is now another risk to growth coming from the outbreak of swine flu."

Borkin said the June quarter was also likely to have seen a contraction and ANZ has pencilled in another negative quarter in September.

"There are encouraging signs of stabilisation overseas and migration flows are accelerating, providing some support to the housing market and consumption," he said.

But the export sector still faced a weak global economy and a currency doing it no favours at all.

BNZ economist Craig Ebert expects GDP to have declined 0.2 per cent in the June quarter and to eke out a slight expansion over the second half of the year. He sounds a wary note, however.

"A couple of months' worth of stabilising indicators does not wave a magic wand over the excess leverage that remains a significant issue for the global economy."