Booming economy runs out of breath

The economic boom has run out of puff, with official figures showing the economy did not grow at all over the second half of last year.

Economic output shrank 0.1 per cent in the last quarter of 2005, the first contraction since mid-2000, Statistics New Zealand reported. That reversed the feeble 0.1 per cent growth recorded in the September quarter.

It puts pressure on Reserve Bank Governor Alan Bollard to relent from his intention, declared two weeks ago, not to cut interest rates until next year.

Although growth stalled in the second half of last year, that followed four years of very strong growth.

The economy has expanded 19 per cent over the past five years, nearly 4 per cent a year, and that is more than it can sustain indefinitely, given such fundamental factors as the rate at which the workforce and its productivity are growing.

The boom has left the economy with a low unemployment rate of 3.6 per cent and firms running their plant hard but reluctant to invest in new machinery because profits are being squeezed and demand is falling.

The result is a worst-of-both-worlds phase of the economic cycle - little or no growth but inflation too high for comfort.

But Bank of New Zealand economist Craig Ebert said things were not as dire as the headline statistics suggested.

"Sure, in a technical sense the economy is flirting with recession - two successive quarters of contraction. But look around you. Does it feel as though it's in recession?"

Recession seemed a harsh term for an economy with the lowest unemployment rate in the world and inflation above 3 per cent, he said.

"And the dollar is sinking like a stone."

The dollar dropped nearly another cent against the US dollar yesterday after the weak growth figure was released and has fallen 10c from its peak early in December. That provides the prospect of relief for struggling exporters and firms which have to compete with imports.

But a lower dollar will push up the price of imported goods, including petrol, when inflation is already high. That makes the Reserve Bank nervous that people will lose confidence that it has inflation under control.

Westpac chief economist Brendan O'Donovan said the figures confirmed Dr Bollard had been too tough for too long. Strangled by the combination of a high dollar all through last year and the highest interest rates in the western world, the economy was turning blue and gasping for breath, he said.

"We now expect the Reserve Bank to start cutting the official cash rate in June - July at the latest - and keep on cutting until the end of the year."

But because of the time it takes for what Dr Bollard does to the official cash rate to feed through to the economy, the oxygen bottle would not be in full flow until the middle of next year by the earliest, Mr O'Donovan said.

The money markets see a better than 50:50 chance that Dr Bollard will start cutting rates in July.

But ANZ National Bank's acting chief economist Cameron Bagrie said Dr Bollard was in a risk-averse frame of mind and would want to see evidence inflation pressure was easing before he hit the accelerator. He picks September for the first rate cut.

Finance Minister Michael Cullen said the slowdown underlined the value of the Working for Families package which from April 1 would provide significant increases in take-home pay for another 85,000 families.

But National's finance spokesman John Key said more job losses were likely.

"Michael Cullen has squandered the opportunity to strengthen the economy when times were good. New Zealand now faces stormy weather with only a raincoat," he said.