Domestic data in the closing stages of 2008 confirmed what we already knew – economic activity was weak. And indicators are not suggesting much improvement as we head into 2009.
GDP data confirmed that New Zealand was in recession for the first nine months of 2008, with third quarter GDP falling 0.4%. Annual GDP growth is now running at -0.1%. The result was broadly in line with expectations, and reflected weak demand across the board – households spent less, businesses invested less, and we exported less. A few bright spots came from drought recovery (boosting agricultural and electricity production) and government spending. But overall, there were few signs that conditions will improve in the near term. In fact, the odds are for a further contraction in fourth quarter GDP, meaning the economy was in recession for all of 2008.
Heading into 2009, the indicators are pointing to a very soft start. On the business front, confidence showed a slight improvement in sentiment relative to November, but the more important own-activity measure (generally a better indicator of current GDP) hit the lowest level in the 20-year history of this survey. Profit expectations, employment and investment intentions also established new record lows.
Confidence amongst consumers also eased back in the December quarter, with the Westpac McDermott Miller Index falling 3.5 points to 101.3. The fall was driven largely by concerns over the short term economic outlook, with a net 45% of respondents saying they expected economic conditions to deteriorate over the next twelve months – lower than the net -17% in the September 2008 quarter and close to the 10 year low recorded for this series in the June 2008 quarter. It seems the escalation of the global financial market turmoil into a full blown global economic downturn overwhelmed consumers at the end of last year, particularly the in the dairyintensive regions of New Zealand. In fact, it is worth noting that the fall in confidence was largely concentrated in the Canterbury and Waikato regions and was almost entirely amongst males.
Arguably, dairy farmers have felt the illwinds of the global downturn earlier than many other consumers, with Fonterra revising down its forecast for the payout this season from $7.00/kg milksolids to $6.00/kg currently, and there is a risk that it may be even lower given the continued falls in dairy commodity prices. This will see farmers’ incomes take a substantial hit over the coming year relative to the past year, so it is not surprising that consumers in these regions are feeling downbeat. Overall, though, the message is that in the eyes of the consumer, not even lower fuel prices, falling interest rates, or the new government can rescue the New Zealand economy from the wrath of the global downturn over the coming year.
