Economists wary over form of recovery

The national accounts due out on Wednesday are expected to confirm the economy has cleared the first hurdle to recovery: that before things can get better they have to stop getting worse.

The median forecast of market economists is that June quarter gross domestic product contracted just 0.1 per cent, compared with falls of 1 per cent in each of the two previous quarters. Such is the margin of uncertainty around such forecasts that a flat or slightly positive out-turn would not be a surprise.

"The economy is likely to have stabilised and will remain steady over the next couple of quarters," said ASB economist Jane Turner.

"The biggest drag on GDP will come from construction and manufacturing, although the data suggest declines in these sectors have not been as large as previously expected."

Westpac economist Doug Steel said, "In construction the scary economic landscape of six to 12 months ago saw investment plans delayed or cancelled and a slump in building consents at the time."

The June quarter would record the resulting drop in non-residential and residential activity, which were down 2.5 and 6.5 per cent respectively according to Statistics New Zealand's building work put in place survey.

Manufacturing, even after posting its steepest quarterly decline since 1977 in March, was expected to record another drop in the June quarter, Steel said, to be about 16 per cent down on a year earlier. "It appears that inventories were significantly run down to support the sales that did take place."

Turner said most of the offset to declines in manufacturing and construction would come from an increase in finance, insurance and business services, underpinned by the recovery in house sales.

Retailing was likely to make a small positive contribution as well, the retail trade survey having recorded a 0.4 per cent lift in sales volumes in the quarter.

On the expenditure side of the accounts, economists expect most of the increase in consumption to have come from the Government, with little or no real increase in private spending.

"Our forecast 0.2 per cent increase in spending, if it occurs, is nothing to write home about if you consider the degree of support from lower interest rates and tax cuts that consumers received during the quarter, and that it follows the largest decline in spending for 18 years," Steel said.

Residential and business investment are expected to have contracted, but that would be offset by a positive contribution from net exports.

Import demand was weak while volumes of export commodities, including dairy, aluminium and logs remained robust, Turner said.

But the strength in commodity exports had masked underlying weakness in other exports which was likely to become more evident over the next few quarters, she said.

As for whether the June quarter will prove to be the trough of the cycle, economists are cautious. Risks of a double dip, or w-shaped recovery, remain. Even those who believe it will be the trough warn that growth in the near term is likely to be subdued as still-rising unemployment casts a shadow over consumer confidence and the spare capacity which has opened up in the economy reduces the need for investment spending, while a strong Kiwi dollar frustrates hopes for an export-led recovery.

"We will see stability and some signs of growth coming through but it's going to feel quite underwhelming," said BNZ economist Craig Ebert.

"Is it definitely the turning point? We won't know that for at least another 12 months because there are still some possibilities of a double dip. When demand crashed because of an unsustainable debt load it left supply stranded at the top of the cliff. Now everyone has spare capacity coming out their ears.

The big question is: can you get demand back up to meet supply? I'm not convinced."

THE OUTLOOK

* Economists are cautious on whether the June quarter will prove to be the trough of the cycle.
* Risks of a w-shaped recovery remain.
* Even if the economy has bottomed out, any short-term growth is likely to be subdued because of rising unemployment and the strong Kiwi dollar frustrates hopes for an export-led recovery.