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.

A Little Economic Information is a Dangerous Thing - The Saveloy & Condensed Milk Conspiracy

Residents of Taranaki in the North Island are reported to be stockpiling cans of condensed milk and saveloys after a recent TV news report that Statistics New Zealand is to remove the items from the basket of goods & services priced to calculate the consumer price index used to measure inflation.

The Saveloy ---- Condensed milk

Lest anyone think Joe & Joanna Blow, the average Kiwi citizen, are well-versed in the methodology of economic statistics, attuned to the niceties of index numbers and the household expenditure survey, it appears that the news story has been twisted into a conspiracy story or urban myth that the government is about to ban the humble sav and can of condensed milk, one-time staples of low income Kiwis.

With a general election only just called last week for 8 November, what government in its right mind would contemplate such political suicide? Some would argue that the current Labour government has already done enough to harm itself without outlawing the sav & condensed milk.

All a horrible mix up in a dumbed-downed age, but a boon for supemarkets in places like Hawera in Taranaki that report sales up by a third in recent weeks.

For those not versed in Kiwi culinary delights, a saveloy is a type of pork sausage usually with a bright red skin, usually served boiled & wrapped in a slice of bread or deep fried in batter (not a health food). And condensed milk is milk that has had much water removed from and to which sugar has been added to yield a rather thick, sweet product that can last for years in a can. It's used to sweeten & whiten tea, in baking, or as a salad dressing. (Ugh!)

Incidentally, the sav and condensed milk would be unlikely meal mates, but no doubt there is some thrillseeker out there who enjoys them together. A sav is more typically dipped in tomato sauce (ketchup).

Reserve Bank Chops OCR by 0.5 percent in 2nd Rate Cut

The Reserve Bank slashed the Official Cash Rate, its lending rate, 50 basis points - twice as much as expected by financial analysts - in its second rate cut in around six weeks. The cumulative rate reduction is now 0.75 percent. See press statement here. The September Monetary Policy Statement released at the same time may be found here.

With its primary policy responsibility as set out in the Policy Targets Agreement (PTA) as the requirement to keep inflation within the 1-3 percent range in the medium term, the Bank predicts that the "marked slowdown, led primarily by the household sector" will result in "lower inflation pressures in the medium term". An easing in world oil prices is probably likely to more than offset the depreciation of the Kiwi dollar that is taking place in recent weeks as the US dollar regains some strength.

The Reserve Bank points to tightening credit conditions within New Zealand impacting households and business as grounds for bringing forward its easing of monetary conditions. No doubt the Bank is mindful of the chronic financial stress in some parts of the financial sector (see yesterday's post) and the real estate market, and the high debt burden of the household sector that in the absence of monetary easing might precipitate an accelerated rate of foreclosures and personal bankruptcies. After years of low domestic saving rates and a consumption binge, "tomorrow" has arrived and the chips are falling where they may.

Edgy times at the Bank.

While this blog concluded back in late July that "A half-point cut, and some months ago, might have been more in order given the increasing gravity of the financial instability and weakening macroeconomic conditions", we are under no illusions that Governor Alan Bollard reads our scribblings. Still, we are pleased that through ESP or analysis moving in parallel he has reached the same conclusion albeit a bit later in the piece!