English says tax package will help after GDP shock

Finance minister Bill English. Photo / Sarah Ivey

New Zealand's economic growth hit the brakes in the second quarter, falling short of expectations, and supporting the Reserve Bank's decision to pause in tightening interest rates. The kiwi dollar tumbled.

Gross domestic product expanded 0.2 per cent in the three months ended June 30, according to Statistics New Zealand, a quarter of the 0.8 per cent pace predicted by a Reuters survey of economists and the 0.9 per cent forecast from the Reserve Bank.

But Finance Minister Bill English says next week's tax package, which includes personal income tax cuts but also an increase in GST, will help the economy.

Growth in the first quarter was revised down to 0.5 per cent from 0.6 per cent. The kiwi dollar sank 0.7 per cent to 73.08 US cents after the release.

"The economy has effectively stalled and lost momentum in the second quarter," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "The Reserve Bank is well and truly out of play for the rest of the year."

Economic growth has stumbled this year as optimism the world was coming out of the global financial crisis in a "V-shaped recovery" was eroded by fears about Europe's sovereign debt. That's prompted central bank Governor Alan Bollard to rein in his projected track of rising interest rates, and keep a certain amount of stimulus in the economy.

Finance Minister Bill English said today's figures showed "mixed economic news".

"A fifth successive quarter of economic growth is another sign the recovery is continuing - and the Government's tax package next week will further help the economy in the long-term," he said in a statement.

"GDP figures today show the economy is continuing to recover - although it remains clear that this recovery will be bumpy at times."

"The latest quarterly growth was below expectations, but it reflects the patchy nature of this recovery. Total domestic spending fell slightly. By contrast, export volumes have increased 7 per cent from their lows of 2008 and they had their second strongest quarter on record," he said.

"This trend towards saving and exporting more, and spending and borrowing less, is what New Zealand needs to build stronger long-term growth."

This adjustment will be helped by the tax package on 1 October - which would boost New Zealand's longer-term growth prospects by "tilting the economy towards savings, investment and exports and away from borrowing, housing speculation and consumption."

English said he expected volatility in the next few quarters of GDP data, when the impact of the Canterbury earthquake and global uncertainties would "no doubt impact on New Zealand's immediate economic performance."

"This reinforces the need for the Government to press on with its comprehensive plan for turning around the economy," said English.

Today's GDP figures showed construction bounced back in the period, growing at a 6.4 per cent pace after a 0.8 per cent rise in the March quarter, the biggest quarterly gain in seven years. The sector is expected to benefit from the reconstruction of Christchurch after Canterbury was hit by a 7.1 magnitude earthquake.

Statistics NZ added to the chorus of voices saying the earthquake isn't a boon for the nation. In a section on the impact of the quake, the department said "looking at GDP in isolation fives a false impression that this disaster will be good for the economy."

The GDP data doesn't take into account the $2 billion to $4 billion worth of damage to capital assets, or that building work and consents will need to be replaced, businesses are closed and people are unable to go to work, the department said.

-WITH NZ HERALD