Drought-hit exports drag down June GDP figure

By Brian Fallow

WELLINGTON - Analysts forecast the Reserve Bank is still more likely than not to raise interest rates in November, despite a shocker of a June quarter gross domestic product figure.

The economy shrank 0.3 per cent in the quarter, instead of expanding the 0.5 per cent the markets had expected.

The primary sector shrank 3.2 per cent; manufacturing, utilities and construction shrank 1.2 per cent; and the services sector could manage only an anaemic 0.4 per cent growth.

Reaction to the figures on the money market was dramatic: 90-day bank bill yields dropped from 5 to 4.85 per cent immediately - one of the sharpest drops since the official cash rate was introduced in March - and ended the day at 4.88 per cent.

The dollar dropped 1 per cent on a trade-weighted basis.

ANZ Bank treasury economist David Drage nevertheless still considered it "reasonably likely" the Reserve Bank would raise the cash rate on November 17, effectively pushing up floating mortgage rates.

"While the GDP result gives reason to be cautious about the pace at which better global growth will flow through to the local economy, we believe the Reserve Bank will still hold to its projections of a more robust recovery in 2000 and beyond, based on the prospect of better trading partner growth," said Mr Drage.

Furthermore, yesterday's market reaction had pushed the monetary conditions index back to levels much more stimulatory than the bank had assumed for the second half of 1999.

Deutsche Bank economist Chris Green said while yesterday's result lessened the prospects of the Reserve Bank tightening on November 17, it would be premature to suggest such a move was off the agenda.

WestpacTrust chief economist Bevan Graham said the GDP result made a November tightening much harder to sell but still more likely than not.

Bank of New Zealand economist Geoff Mason said a rise of 25 basis points was now more likely than the 50 points assumed in monetary policy statement.

Growth in the domestic economy was entirely offset by negative net exports.

Preliminary trade figures for August, also released yesterday, continued to show imports outstripping imports. In the three months ended August exports were up 5.1 per cent on the same period last year, but imports were up 13 per cent.

Household consumption was flat. Mr Mason said some of that could be put down to the timing of Easter which had pulled some consumption into the March quarter, but it also reflected the extent to which the pick-up in consumption in previous quarters had been on borrowed money, and income growth had not kept pace.

Residential construction was up nearly 7 per cent in the quarter, and while there was little further increase in business investment it at least held up after the strong growth of the previous two quarters.

Stocks increased sharply, by $476 million.

Some of that was farmers holding on to livestock to take advantage of good growing conditions, some was oil companies anticipating further rises in crude oil, and some retailers anticipating Y2K difficulties.

But Statistics New Zealand said that with imports up and exports down, along with flat household consumption and business investment, much of the remain build-up in stocks might be involuntary.

As those inventories were wound down, it would tend to depress GDP growth in coming quarters.