Economy goes into reverse

The economy unexpectedly went backwards in the December quarter, according to data out today from Statistics New Zealand.

It showed gross domestic product (GDP) fell a seasonally adjusted 0.1 per cent in the three months.

This is the first drop after 21 consecutive quarterly rises. It compared with a median expectation from economists of 0.2 per cent growth, and the Reserve Bank's forecast of 0.4 per cent growth.

The news sent an already under-pressure New Zealand dollar crashing half a cent lower to under US62c in less than five minutes. It has plunged over 12 per cent this year.

In 2005, the economy grew 2.2 per cent, down from 4.3 per cent in 2004 and against a median forecast by economists of 2.7 per cent growth.


UBS economist Robin Clements said the data was a "doozy".


"The most important thing is that it has again surprised the Reserve Bank on the low side. They had plus 0.4 per cent. It's half a per cent out and it has to accelerate the easing cycle. They have been saying 'not this year', but I think it will have to be this year," he told Reuters.


Deutsche Bank chief economist Darren Gibbs said he expected to see a rate cut this year.


"I'll probably stay with September being the likely timing, but clearly the market will worry that maybe it could come earlier in July," he said.


The RB had forecast GDP growth of 2.4 per cent for the December year. RB governor Alan Bollard has said he wants signs of a sustained economic slowdown before he is prepared to ease the official cash rate from 7.25 per cent.

He said earlier this month he did not expect to cut rates before the end of the year, but the market has widely disregarded this and talked of an easing as early as September.

Today's GDP data is likely to add fuel to talk of rates falling sooner rather than later.

Statistics NZ said the key drivers of the quarterly fall were a 2 per cent drop in wholesale trade, a 1.5 per cent fall in communication services, and a 0.9 per cent fall in manufacturing production.

The fall in wholesale trade reflected a drop in vehicle wholesaling, while lower domestic and international travellers pulled down transport and communication services. Most manufacturing industries posted falls in the quarter.

But the government administration and defence posted its 17th consecutive quarter of growth, up 3.7 per cent.

Internal demand fell 1.9 per cent in the December quarter, the first decline since March 2003.

This fall was partly offset by a lift in the external account, with export volumes up 1.6 per cent, against a 4.1 per cent fall in import volumes.

In news that will not please Dr Bollard, household consumption continued to grow in the December quarter, up 0.3 per cent, with household spending up 4.6 per cent for the December year.

Statistics NZ said the rise in household consumption was driven by a fall in non-resident expenditure, which dropped 9.4 per cent. Clothing and footwear continued to be snapped up, gaining 2.9 per cent over the quarter.

Spending on food and drinks both rose 0.4 per cent over the quarter.

Household consumption expenditure's biggest offsetting factor was a 4.2 per cent fall in transport, driven by a 7.3 per cent fall in used car sales.

Goods and services were down 1.3 per cent and restaurants down 1.6 per cent.

The housing sector also grew, with investment in new residential building up 2.5 per cent in the December quarter, following two quarterly falls. For the year to December new housing investment fell 4.3 per cent.

Business investment in fixed assets fell 0.2 per cent in the quarter, after five consecutive quarters of growth, but recorded a 7.1 per cent rise for the December year. The quarterly fall was driven by a 1.7 per cent fall in investment in plant, machinery and equipment.

Inventories fell $198 million, following a $448 million build up in the September quarter.

Activity in the primary industries rose 0.9 per cent in the quarter and 0.5 per cent over the year.

Activity in goods-producing industries was flat in the December quarter and down 1.2 per cent over the 12 months.

- NZPA