NZ Economy Contracts 0.9% in 4 Quarter

NZ Economy Contracts 0.9% in 4 Quarter

·        The economy contracted 0.9%q/q in 4Q, in line with our expectation
·        Recession to extend for at least another two quarters
·        Trade balance returns to surplus

The New Zealand economy contracted 0.9%q/q in 4Q (J.P.Morgan -0.9%, consensus -1.1%), after shrinking a revised 0.5% in the September quarter (previously -0.4%). The fall in 4Q GDP marked the fourth straight quarterly decline but, on our forecasts, GDP should decline for at least another two quarters, before the economy posts a very mild recovery in 2H09. In the year to the December quarter, the economy contracted 1.9%oya, only the second annual contraction since 1998. The first was in the prior quarter, when GDP contracted a mere 0.1%oya.

Private consumption surprisingly was flat in 4Q, following three straight quarters of decline. Falling petrol prices and lower interest rates probably prevented the contraction we had forecast. Widespread recession fears and the wealth destruction underway in the household sector mean, though, that household spending, which accounts for nearly two thirds of the economy, will remain depressed in 2009 – consumers are being cautious, choosing to save rather than spend given increased anxiety about job security. The jobless rate rose to a five year high of 4.6% in the December quarter, and firms’ hiring intentions are near record lows.

Weak confidence weighed on investment again in 4Q. Reflecting the significant and prolonged downturn in the housing market, residential investment tanked 14%q/q, the fifth consecutive fall. Reduced credit availability and tighter lending standards again deterred business investment, which fell nearly 2%. While these components were major drags on GDP growth in 4Q, they were offset to some extent by increased government spending, which rose nearly 2%.

Export volumes fell 3.3%q/q in the December quarter, owing to weaker external demand, although the weaker Kiwi dollar softened the blow—the NZ dollar shed 13% against the US dollar in the final three months of the year. Weak domestic demand again led to fewer imports, which tanked a nearly double the rate for exports, falling 6.1%q/q after a similar sized fall in 4Q.

We forecast that the economy will expand, albeit very modestly, in the second half of the year. The significant monetary and fiscal policy easing that has been (and will be) delivered should help New Zealand recover from this prolonged recession, with our forecast calling for annual GDP growth of 1.7% in 2010. The forecast recovery, though, will be milder than those experienced after previous recessions, where growth averaged 5%, mainly owing to the long process of household de-leveraging that still has to run its course.

Easing inflation pressures, sagging domestic house prices, and falling terms of trade give the RBNZ ample scope to ease policy further. We expect 25bp moves at the next two policy meetings in April and June, taking the OCR to 2.5%, which we believe will be the terminal rate in this easing cycle. The risks to this forecast remain skewed to the downside.

Other data released today showed that New Zealand’s trade balance improved to a surplus of NZ$489 million in February (J.P.Morgan –NZ$150 million, consensus +NZ$25 million) from NZ$187 million in January, which was the smallest deficit since January 2001. The annual trade balance was a deficit of NZ$5.2 billion, compared to a deficit of NZ$5.4 billion in January.

Imports tumbled 14.2%oya in February, the largest drop in 16 years, mainly owing to crude oil imports (-70%) – lower volumes were mainly to blame. Exports marked their first annual fall since August 2007, declining 6.6%, owing to fewer dairy exports. Shipments of milk powder, butter and cheese were down NZ$288 million as prices fell.

Weak domestic demand will mean that imports trend lower in coming months, while the worsening outlook for the global economy means there are tough times ahead for Kiwi exporters. The marked deterioration in conditions in the country’s dominant trading partners is the largest headwind facing the nation’s exporters, meaning that net exports will remain a significant drag on growth in 2009.

ends

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