Economy shrinks so kiwi drops

The kiwi dollar shed nearly a cent against the US dollar yesterday on news that the economy shrank in the December quarter.

The decline of 0.1 per cent in gross domestic product, reversing a 0.1 per cent gain in September, was at the low end of the range of economists expectations and saw the kiwi drop from US62.4c before the release to a low of US61.4c before recovering slightly to end the day trading around US61.5c.

It has now lost US10c from its most recent peak last December. Economists pointed to one-off factors behind the unexpectedly weak outcome.

Manufacturing activity shrank 0.9 per cent, its fourth consecutive decline. Some of that was a shutdown at the Methanex methanol plant in Taranaki, which has since resumed production, Statistics New Zealand said, but all sectors of manufacturing were weaker except textiles and wood and paper production.

Agriculture was flat, reflecting a 0.5 per cent drop in dairy production after a strong start to the season in the previous quarter.

The transport and communications sector fell 1.5 per cent, hit by an unusually sharp drop in domestic and international air travel.

Value added in the electricity sector was down as the low level of the hydro lakes required more generation from thermal power stations whose fuel is not, unlike water, free. But fishing and forestry, construction and the Government sector all posted gains of more than 3 per cent for the quarter.

On the spending side of the accounts, household consumption weakened, growing only 0.3 per cent compared with 0.6 per cent in the previous quarter. Spending on durable goods was 1.4 per cent lower. But that was more than offset by a rise in Government consumption, up 0.5 per cent.

A 2.5 per cent rebound in residential construction during the quarter is thought to relate to fluctuations in the issuing of building consents early last year rather than heralding a second wind in the sector. Compared with a year earlier, residential investment was down 4.3 per cent. And business investment in plant and machinery, which had been strong earlier in the year, fell by 0.2 per cent.

Deutsche Bank chief economist Darren Gibbs said: "That will continue as firms whose profits are being pared back look to cut costs."

In a turnaround from previous quarters, however, net exports made a positive contribution as import volumes fell 4.1 per cent while exports rose 1.6 per cent.

The expenditure measure of GDP recorded no increase at all, however, as growth in demand was entirely met by a rundown in inventories.

It was not just a reduction of dairy stocks for export. Statistics New Zealand said there were significant general declines in manufacturers' and distributors' stocks.

Gibbs said weakness driven by inventory reduction was typically seen as more benign than weakness due to soft demand as it usually promised a rebound in production in the subsequent quarter.

"However we do not expect that to happen this time," he said.

"With profits under pressure from rising costs, with stock-holding costs high due to the level of interest rates and with uncertainty about the outlook for demand, we do not expect a significant rebuild of inventories next quarter."

HSBC chief economist John Edwards said the slowdown in private consumption was just what the Reserve Bank wanted.

"But house construction was up quite firmly. The bank didn't want that at all," he said.

"It would be delighted by the increase in export volumes and the fall in import volumes, but it might well be sceptical indeed that the trends there are as good as they appear."

But all up the data suggested the Reserve Bank was closer to its goal of rebalancing between domestic demand and exports than it thought, and that inflation pressures were not quite as strong as it feared, Edwards said.


Growth down

* Economy shrinks 0.1 per cent in December quarter, cutting growth for the year to 2.2 per cent from 4.3 per cent in 2004.
* Slowdown spreads from goods-producing sectors to services.
* But the dollar has fallen, offering relief to exporters and NZ's trading partners are going strong.
*And increased Government spending is offsetting weaker private consumption.