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Weekly Commentary

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Been down so long it feels like up

Mon, Sep 29 2008, 08:40 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

New Zealand’s GDP shrank another 0.2% in the June quarter, the second consecutive quarter of negative growth, but not as bad as expected. The prospect of a technical recession has been on the table for what feels like a long time, so these figures actually come as something of a relief.

The New Zealand economy faced some severe tests through the first half of this year: a drought that cut into agricultural output and hydro power generation, a slump in the housing market, a sharp increase in oil prices, and the ongoing squeeze in international credit markets. For output to contract by just 0.5% in that time is a remarkable performance.

The biggest surprises in the GDP figures came from the farming-related sectors. Agricultural output fell by just 0.6% in Q2, following a 4.6% drop in Q1, and food manufacturing was also surprisingly strong. We expected a much larger decline in dairy production, which would have offset the very large positive contribution coming from meat due to the earlier slaughter. We still expect this weakness to show up, but now in Q3. This tips our forecast for Q3 GDP into negative territory at -0.1% (from 0.1% previously).

The other impact of the drought was a switch away from relatively cheap hydro electricity generation. This lowered the value added in the utilities sector, in addition to the overall decrease in the amount of electricity generated. GDP in the electricity, gas and water sector fell by 1.6%.

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Published on  Mon, Sep 29 2008, 08:42 GMT