Economic decline fastest in 16 years, more weakness expected

Construction activity fell 4.4 per cent in the December quarter, said Stats NZ. Photo/Brett Phibbs

The New Zealand economy shrunk at its fastest rate in 16 years in the December quarter and further weakness is expected.

Statistics New Zealand (SNZ) today said gross domestic product declined 0.9 per cent in the three months, meaning the economy contracted during each quarter of 2008.

Despite that, annual GDP for the year to December increased by 0.2 per cent, as the economy contracted at a slower rate in 2008 than it grew in 2007.

SNZ said primary industry activity increased 1.6 per cent in the December quarter, while activity in goods producing industries fell 3.6 per cent.

Construction activity was down 4.4 per cent in the quarter, driven by a fall in residential building and construction trade services.

Service industry activity rose 0.8 per cent in the December quarter, following two quarters of decline, SNZ said.

The main contributor to the rise in service industries was a 2.2 per cent increase in finance, insurance and business services.

ANZ bank said it expected the March quarter to record another, possibly larger, fall in activity.

While some early signs of stabilisation were showing up in the housing market, at least for volumes, other pockets of the economy remained under pressure.

Car registrations continued to fall, and building consents were at levels last seen in 1965.

"The weakness over 2008 was largely domestic led. The first half of 2009 will be where the full brunt of the global recession will impact on the New Zealand economy," ANZ said.

The weaker global economy would hamper the ability for exports to fill a domestic demand void, leaving the economy without any growth engines in the near term.

The GDP figures showed overall total inventories running down $396m, but ANZ said the level of inventories across the country remained high.

The sharp slowing in domestic demand at a time when imports were still at an elevated level had left plenty of stock on shelves, which was only now starting to be reduced.

"Production levels will obviously be adjusted accordingly and see activity remain weak for a time yet."

While the GDP data was broadly in line with the Reserve Bank's projection of a 0.8 per cent December quarter decline, recent financial market developments may mean the Reserve Bank had to do more, ANZ said.

Recent moves in the NZ dollar and in swap rates had tightened monetary conditions significantly, at a time when the economy had yet to show sustained signs of stabilisation.

The Reserve Bank could have to act further, either through interest rate cuts, or in signalling the potential for rates to stay at low levels for an extended period.

"We believe a combination of both is likely."

ASB economist Jane Turner said the GDP outcome was unlikely to undermine the Reserve Bank's reluctance to cut the official cash rate much further.

But she also pointed to the significance of the rise in the NZ dollar, given that the Reserve Bank's longer term outlook was partly based on a weak exchange rate.

And she continued to expect the Reserve Bank to downgrade the extent to which it expected the economy to rebound during the second half of this year.

ASB expected to see the Reserve Bank cut the OCR by 25 basis point amounts in April and June, she said.

It could cut further beyond June, to below 2.5 per cent, if in coming months the economy was not giving signs of delivering the strong second half rebound the Reserve Bank expected.

- NZPA