Thursday, September 25, 2008

New Zealand Economy Officially in Recession

The New Zealand economy officially entered recession in the June quarter 2008 according to GDP data released by Statistics New Zealand today.

Expenditure on GDP dropped by almost 1.2 percent over the first half of 2008, with consumer spending dropping by nearly 0.7 percent over the same period, reflecting weakening household expenditures in the face of lower consumer confidence in general economic conditions. Slowing retail sales and a contraction in investment spending in housing is resulting in an inventory build-up that indicates businesses at the manufacturing and distribution levels are beginning to hold excess stocks that retailers are unable to sell.

In the trade sector, exports of goods and services fell 2.1 percent over the past six months as a high Kiwi dollar & interest rates combined with weakening international demand. The biggest reduction in export volumes came from dairy products that had expanded rapidly in recent years as part of a commodity boom. Reflecting the lag that typically takes place as the economy enters a recession, imports continued to surge by nearly 4.7 percent as domestic consumption fell. Strong demand for capital goods by businesses also contributed to the strong growth in imports.

New Zealand last experienced a recession with three quarters of real GDP decline in 1998.

Economists are now revising their forecasts for September quarter GDP downwards as the June quarter GDP tracks lower than previous estimates.

Since July, the Reserve Bank has cut official interest rates from 8.75 to 7.0 percent in two steps. Now analysts are expecting a further 0.5 percent cut at the Bank's next interest rate review late next month with rates down to 6.5 percent by early 2009.

Tempering the Bank's softening of monetary conditions is the risk of accelerating inflation that at least one commentator considers (somewhat exaggeratedly) to be "rampant" at 4 percent.

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