GDP falls in weakest quarter since 1992

Economic activity shrank 0.9 per cent in the last three months of 2008, its weakest quarter since 1992.

It was the fourth quarterly fall in gross domestic product and meant the economy ended the year 1.9 per cent smaller than at the start.

The contraction fell midway between market and Reserve Bank forecasts of 1 per cent and 0.8 per cent respectively.

Most sectors went backwards, the exceptions being agriculture and some services, particularly government and financial services.

Agricultural output continued its recovery from last summer's drought, growing 4 per cent in the quarter, seasonally adjusted. Dairy production was the main contributor.

But manufacturing and construction continued to struggle, falling 3.8 and 4.4 per cent respectively.

On the expenditure side, household consumption was flat.

While that is better than the three preceding quarters in each of which it fell, it is not much to show for a quarter which began with tax cuts and then saw the Reserve Bank cut the official cash rate from 8 to 5 per cent and petrol prices fall 50c a litre.

Households cut their spending on durable items, like cars, appliances and furniture, by 1.4 per cent. They spent 0.2 per cent less on non-durable items too, but spending on services rose 0.5 per cent, especially air travel.

The net effect was to leave private consumption running at a level 0.7 per cent lower than in December 2007.

The Government sector, by contrast, increased its consumption of goods and services by 1.7 per cent in the quarter, making 4.4 per cent for the year.

Investment spending shrank 5.3 per cent overall. Residential building was down 14 per cent in the quarter, making a decline of 31 per cent over the year, while spending on plant and machinery fell 4.8 per cent.

As in the September quarter, net exports made a positive contribution to GDP but only because export volumes fell less (3.3 per cent) than imports (6.1 per cent). This is seen as a positive trend given the size of the country's trade and balance of payments deficits.

"If anything positive can be taken out of the numbers it is that the economy is slowly rebalancing, from the spending towards the earning side of the economy," said ANZ National Bank economist Philip Borkin.

The trouble, though, was that the global economy was so weak at present it would struggle to fill the void left by declining domestic demand. "This leaves the economy without any growth engines in the near term."

ANZ expects another, if not larger, negative quarter in March.

Bank of New Zealand head of research Stephen Toplis said it was quite conceivable the December quarter would prove to be the steepest quarterly drop in this cycle.

"That's not to say all will be well soon. To the contrary, we are expecting two or three further quarters of negative growth and unemployment rising steadily for at least the next 18 months."

At that rate the absolute level of activity in the economy would not return to its December 2007 peak until September next year at the earliest, Toplis said. He doubts the December GDP out-turn will make any difference to the Reserve Bank's thinking.

"Far more disconcerting for the Reserve Bank, and the economy as a whole, has been the recent unsolicited and unwelcome tightening in monetary conditions."

The combination of a sharp rise in the dollar - reflecting a weakening US dollar, rather than anything fundamental about New Zealand - and ongoing rises in wholesale interest rates were acting as a contractionary force at a time when that was undesirable, Toplis said.

FLAT SPENDING
* Consumer spending flatlined, in real terms, in the last three months of 2008.
* That is better than the three previous quarters when it shrank.
* But it is not much to show for a quarter which began with tax cuts and then saw the Reserve Bank cut the official cash rate from 8 to 5 per cent and petrol prices fall 50c a litre. Economist doubts latest result will have any effect on Reserve Bank's actions