Slump figure may be worst yet

A fifth successive quarter of economic contraction is expected to be reported on Friday when the March quarter national accounts are released.

The median pick among 13 economic forecasters polled by Reuters last week was for a 0.7 per cent decline in gross domestic product (GDP).

However, many of the larger ones take a gloomier view: the Treasury says minus 1.1 per cent, the Reserve Bank and ANZ National Bank minus 1 per cent and Westpac minus 0.9 per cent. If they are right it will be as deep or deeper than the worst quarterly contraction so far, December 2008's 0.9 per cent.

The economy shrank 1.9 per cent last year in the recession's first four quarters.

ASB, which is picking a relatively optimistic 0.5 per cent decline for the March quarter, believes the underlying momentum is weaker than such a number would suggest, with one-off factors providing temporary relief.

Construction activity data for the quarter were surprisingly resilient. A fall of 0.7 per cent was recorded, much smaller than in any quarter last year.

"Nonetheless, the weakness in demand for new housing construction, as demonstrated by the large decline in consent issuance, will eventually catch up with activity," ASB economist Jane Turner said. ASB expects residential construction to record a large decline in the current quarter before bottoming out over the second half of the year.

Statistics New Zealand's quarterly survey of manufacturing recorded a 0.2 per cent rise in sales volumes in the March quarter - the first increase since September 2007 - buoyed by a 23 per cent increase in meat and dairy product manufacturing. Excluding those sectors - where sales may have represented the rundown of inventories - volumes were down 6.5 per cent, a record decline.

Westpac economist Doug Steel said: "All up we suspect the March 2009 quarter was the worst decline for the manufacturing sector in more than 30 years." Globally manufacturers had suffered more than most from the fallout of the credit crunch as purchases of durable goods were delayed or cancelled, he said.

The March quarter also saw retailers record a 2.9 per cent fall in real sales, twice as much as the previous record fall. But other parts of the services sector, which makes up more than two-thirds of the economy, are expected to fare better.

With housing market activity lifting, Turner said indicators were pointing to weak but positive growth in the finance, insurance, property and business services sector.

Steel said Government spending would also make a positive contribution to growth in the services sector.

On the demand side of the books, Westpac expected to see "severe" falls in both consumer spending and business investment, he said.

He is forecasting a 1.8 per cent fall in consumer spending, which would be the steepest decline since GST was introduced 20 years ago, despite the positive influence of the April 1 income tax cuts, a drop in petrol prices and lower interest rates.

The decline in business investment is expected to be even steeper at 7 per cent, Westpac forecasts. "A 25 per cent plunge in commercial vehicle registrations is indicative of the investment climate prevailing in the March quarter," Steel said.

But the March quarter accounts reflect the state of the economy up to six months ago. In the current quarter business sentiment surveys have improved, albeit from depressed levels.

That pointed to stabilisation in economic activity, Turner said, and declines in GDP were likely to be much smaller in the year's second half.

But while economic recovery was expected to take hold over 2010 it remained very fragile, she said.

ANZ National Bank chief economist Cameron Bagrie said economists tended to underestimate both troughs and recoveries. "In a recession you tend to accumulate quite a lot of pent-up demand." But it would be an unsustainable one-shot wonder.

Bagrie said he would not be confident of a decent recovery until he saw sustained improvement in such structural indicators as the current account, savings rates and consumption as a share of GDP.

RECESSION SO FAR

New Zealand's GDP:

* March quarter 2008-0.3 per cent
* June quarter 2008-0.2 per cent
* September quarter 2008-0.5 per cent
* December quarter 2008-0.9 per cent