Sagging economy will keep brake on rate hikes; kiwi dips below 73 Aust cts
By Paul McBeth
Dec. 22 (BusinessDesk) – New Zealand’s sagging economy, which narrowly avoided another recession in the third quarter, will probably force the Reserve Bank to sit on interest rate hikes for longer.
Gross domestic product shrank 0.2% in the three months ended Sept. 30, according to Statistics New Zealand, compared to the 0.2% growth predicted in a Reuters survey of economists and the 0.3% forecast from the Reserve Bank. Growth in the second quarter was revised down to 0.1% from 0.2%.
That will give central bank Governor Alan Bollard cause to rethink his already slower track for interest rate hikes next year when he next reviews the official cash rate in January. Bollard has been accused of tightening rates too early when he boosted the OCR by 50 basis points over two meetings to 3% this year, and has since back-pedalled on his forecast track for higher rates. Traders are now betting Bollard will add 56 basis points to the OCR over the coming year, according to the Overnight Index Swap curve.
The market will presume the Reserve Bank will keep the official cash rate low “beyond next June as a result of the negative quarter for GDP,” said Robin Clements, economist at UBS New Zealand. “Technically it's not a recession, but there's not a lot in it, with early warnings all indicating an economy struggling to get off the ropes.”
The kiwi dollar fell to a fresh 10-year low against its Australian counterpart, touching 73.99 cents. It recently traded at 74.05 Australian cents.
Tim Kelleher, head of institutional FX sales New Zealand at ASB Institutional, said the New Zealand/Australian dollar cross-rate is “bearing the brunt” of the weak data, though a lot of negativity had already been priced in by the market.
Today’s data follows a more benign balance of payments in the third quarter, with the current account deficit coming in at 3.1% of GDP, compared to the 3.4% forecast. Reinsurance money to help pay for the rebuild of Canterbury underpinned the upbeat data, though merchandise trade was in surplus in the year ended September in its highest reading since March 2002.
The economy grew at an annual pace of 1.4%, with 0.1 percentage point of growth being shifted from the 2009 December quarter into the 2010 March quarter, which outpaced the 1.2% increase in the country’s population.
Statistics NZ said the biggest drain on the economy was a slowdown in manufacturing and construction. Manufacturers, who have been hovering around expansion on the BNZ-Business NZ Performance of Manufacturing Index this year, reported a 1.7% decline in the quarter, led by a 6.9% fall in petroleum, chemical, plastic and rubber products, and a 4.2% drop in machinery and equipment.
Construction fell 2.5% in the period as the property market continues in its lull this year amid tepid demand for residential housing and tight access to credit for commercial property investors.
Household consumption, which has been muted over the past year as people focus on repaying debt in a low interest rate environment, rose 0.5% in the period, following a 0.1% increase in the June quarter. At 1.8%, that’s the fastest annual growth since the year through June 2008.
Spending on durable goods climbed 0.9% in its fifth consecutive gain, led by retail furniture and major appliances. Still, the data doesn’t take into account the government’s hike in goods and services tax from Oct. 1, which saw a drop-off in demand for big-ticket items.
Inventories grew $82 million in the September quarter, turning around a $657 million rundown in June, which was revised up from a $530 million rundown in the last release. Manufacturing led the decline, as it wound down $561 million worth of stock. Statistics NZ said the 7.1 magnitude Canterbury earthquake caused significant damage in shops and warehouses, and officials made a $150 million adjustment to distribution inventories which would otherwise have been treated as a rundown.
Export volumes shrank 1.1% in the period with a 17% slump in meat products and a 6% decline in dairy, ending two quarters of gains.
Primary industry growth fell 2.8% in the three months through September, led by declines in fishing, forestry and mining activity.
Government sector spending shrank 0.7% in the quarter compared to 0.5% growth in private consumption expenditure, the first time public spending growth lagged private sector since the December 2009 quarter.