KEY POINTS:
Drought killed off the last vestiges of growth in the economy in the first three months of the year.
The production measure of gross domestic product contracted by 0.3 per cent, bang on market and Reserve Bank expectations.
It would have remained in positive territory - just - but for a drought-related 5.6 per cent drop in agricultural output, the sharpest in 10 years, and an associated 4 per cent fall in food manufacturing.
Mirroring an imploding housing market, construction activity fell 5.2 per cent.
Even the normally robust service sectors were weaker. The finance and business services sector, hit by a sharp drop in house sales, contracted for the first time in eight years.
Combined with a downward revision of the December quarter's growth from 1 to 0.8 per cent, March's 0.3 per cent GDP contraction reduced the annual growth rate 1.9 per cent from 3.5 per cent three months ago.
The deceleration is even more marked in the expenditure measure of GDP, which dropped 0.6 per cent, cutting the annual growth rate to just 0.7 per cent. It would have been even worse but for a build-up in inventories.
"Importantly, this stock build-up was centred on the distribution industries - retail and wholesale trade. At some stage these stocks will have to be run down and/or production reduced," Bank of New Zealand economist Stephen Toplis said.
Household spending fell 0.4 per cent, the first decline in nearly four years, as consumers contended with rising oil and food prices, higher mortgage rates and the demoralising effects of a housing market bust and shrinking employment.
Business investment was down, too, but only on the building side. Investment in capital plant and machinery rose 5.9 per cent in the quarter.
"This is heartening," Toplis said, "but whether it can be maintained is a moot point given that profits are now falling and surveyed investment intentions have slumped."
Net exports, as expected, were also a drag on growth as export volumes fell, especially dairy products, while import volumes rose.
Economists pointed to some areas of volatility in the data. The leap year added a day but an early Easter had an offsetting effect.
The 7 per cent drop in non-residential construction followed a rise twice as large in the December quarter.
The build-up of inventories which contributed 0.8 percentage points to growth, followed a quarter in which a round-won cut 0.6 percentage points off it. And the fall in oil and dairy exports followed large increases in December.
Toplis said the worst was yet to come and the Reserve Bank would soon be forced to react, even in the face of short-term inflation pressure.
"This is not Armageddon," he said. "But it is a cyclical correction exacerbated by a number of shocks. This means the length of the adjustment process threatens to be longer than the 1998 downturn, and the pick-up on the other side less aggressive."
