GDP figures point to deepening recession

Figures this week are expected to confirm a dismal end to 2008, with the economy shrinking 1 per cent in the December quarter while the annual current account deficit widened to $16 billion.

A Reuters poll out yesterday recorded an average pick among 11 forecasters of a 1 per cent decline in the December quarter gross domestic product, which would represent a contraction of 1.9 per cent over the year.

The parlous state of the world economy is compounding the domestic factors - notably a housing market slump and drought - which tipped the economy into recession a year ago.

Westpac chief economist Brendan O'Donovan, who is expecting a 1.1 per cent decline, said demand was weak right across the private sector.

"Consumers spent less, businesses invested less and we sold less to the rest of the world."

Caught between falling house prices, mounting job insecurity and an unremitting flow of bad news from financial markets overseas, consumers are thought to have continued reining in spending and reducing debt or undertaking precautionary saving.

Westpac forecasts a 0.4 per cent decline in consumer spending, with big-ticket items hardest hit. The extra cash flow from lower fuel prices, interest rate cuts and tax cuts was saved, O'Donovan believes.

The external picture is, if anything, even worse.

ANZ National bank chief economist Cameron Bagrie is picking a 1.2 per cent decline in GDP in the quarter. "But even that pales in comparison with some of our trading partners, where we estimate activity contracted 1.7 per cent, export-weighted."

Weak export demand is thought to have contributed to a sharp fall in manufacturing, with broad-based weakness compounded by the shutdown of a potline at the Tiwai Pt aluminium smelter after a transformer failed.

"We estimate this shutdown will knock around 0.15 per cent off December quarter GDP," O'Donovan said.

Construction is also expected to have shrunk markedly, despite a small rise in non-residential building.

Weak consumer demand will have had knock-on effects on retail and wholesale trade and on transport.

But Government services will be up and agriculture too, as the effects of last summer's drought wear off.

Bagrie said that so far this year firms' expectations for their own activity had deteriorated further as had economists' forecasts for trading partner growth. He expects GDP to contract further in the first half of the year.

The Reserve Bank's forecast is for a 0.8 per cent decline in December GDP. A bigger fall, plus the recent rise in the dollar against the US currency, would only intensify calls for a cut of 50 basis points, to 2.5 per cent, in the official cash rate next month, Bagrie said.

Meanwhile the December quarter balance of payments accounts due on Thursday are expected to have gone from bad to worse. The Reuters poll found an average forecast of a $4 billion current account deficit for the quarter, making $16 billion for the year.

That would be an internationally conspicuous 9 per cent of GDP.

The deficit has been that big before, in 2006, but this time it is in the context of a global credit crunch.

However economists expect the current account to improve from here as the Great Recession curbs the country's willingness - and ability - to live so far beyond its means.

Westpac markets economist Michael Gordon said the deficit had shrunk dramatically in previous downturns as import demand sagged, sharp falls in interest rates reduced the outflow of interest payments and the kiwi dollar fell, aiding the trade balance.

DISMAL FORECASTS

* Economists are picking the economy shrank 1 per cent in the last three months of 2008.
* It would be the fourth negative quarter in a row, and the biggest fall yet.
* And the current account is expected to show New Zealand spent $16 billion more than it earned in its dealings with the rest of the world last year.