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New Zealand Economy Shrank 0.2%, Confirming Recession

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New Zealand Economy Shrank 0.2%, Confirming Recession (Update3)

By Tracy Withers
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Sept. 26 (Bloomberg) -- New Zealand's economy contracted last quarter, confirming the nation is in its first recession in 10 years and adding to the prospect the central bank will cut interest rates next month.
Gross domestic product fell 0.2 percent from the first quarter when it declined 0.3 percent, Statistics New Zealand said in Wellington today. The median expectation in a Bloomberg News survey of 13 economists was for a 0.5 percent contraction. From a year earlier, the economy grew 1 percent.
Reserve Bank Governor Alan Bollard has cut the benchmark interest rate by three quarters of a point to 7.5 percent since July to try to kick-start the economy. Facing a contraction again in the third quarter and fresh turmoil in global financial markets, most economists say Bollard will lower rates by a half- point on Oct. 23 with a fourth reduction likely in December.
``The Reserve Bank of New Zealand is going to cut rates again in October,'' said Stephen Walters, chief economist JPMorgan Chase & Co. in Sydney. ``Since they cut by half a point earlier this month, things have gotten a lot worse globally. So there's a case for them to keep going at that rate.''
The New Zealand dollar rose to 68.66 U.S. cents at 11:55 a.m. in Wellington from 68.17 cents before the report was released, gaining because the contraction was less than forecast by economists. The currency has fallen almost 12 percent this year. The five-year government bond yield was little changed at 5.60 percent.
Rate Outlook
``This recession won't be as bad'' as the 1998 slump, said Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney. ``This could be a relatively smaller easing cycle.''
The second-quarter contraction matched the central bank's forecast. Bollard expects the economy will shrink again in the three months ended Sept. 30. Eight of 10 economists surveyed by Bloomberg also predict a third-quarter contraction and the Treasury Department said Sept. 8 it couldn't rule out the possibility.
Finance Minister Michael Cullen said today the contraction is a ``temporary disappointment'' and the economy will recover in the fourth quarter. ``New Zealand's economic prospects are healthy and strong,'' he said in an e-mailed statement.
Bollard cut the record-high official cash rate in July by a quarter point to 8 percent, his first reduction in five years, when most economists expected no change. He followed on Sept. 11 with a half-point cut to 7.5 percent when all but one analyst forecast a quarter-point change.
Consumer Confidence
Ten of 14 economists expect a half-point cut to 7 percent next month. The rest tip a quarter-point reduction.
Consumer confidence fell to a 17-year low in the second quarter as food prices soared, fuel costs reached a record and home-loan interest rates remained at an all-time high.
``A clear shift in consumer sentiment occurred during this period, which placed significant pressure on retail sales, with margins coming under further pressure as retailers sought to clear seasonal inventories,'' Ian Morrice, chief executive officer at Warehouse Group Ltd., said this month.
Auckland-based Warehouse Group, the nation's biggest discount retailer, reported a 52 percent plunge in profit in the six months ended July 27.
The second straight quarterly contraction in gross domestic product was led by a slump in consumer spending, home building and exports, the statistics agency said.
Household spending, which makes up 60 percent of the economy, fell for a second straight quarter, the first successive decline in 16 years.
Business Investment
Purchases of durable items declined 0.7 percent, led by cars. Spending on alcohol, food and other so-called non-durable goods declined 0.8 percent. Spending on health, travel and other services rose.
New Zealanders are buying fewer cars, computers and appliances as they pay higher interest costs on their mortgages and credit cards. A borrower seeking a two-year fixed home loan faced a rate of 9.2 percent in June compared with 8.3 percent two years earlier.
Spending on new housing fell 8.2 percent in the second quarter, the third straight decline, the statistics agency said.
Business investment increased, led by a 16 percent jump in spending on plant, machinery and equipment amid demand from the oil industry. Commercial construction slipped. Inventories held by retailers and the distribution industry rose.
Overseas shipments of goods and services declined 0.2 percent in the quarter as dairy sales dropped. Import volumes rose 3.3 percent led by transport equipment.
Milk Output
Farmers produced 4.3 percent less milk in the year ended June 30 because of a drought, Fonterra Cooperative Group Ltd., the world's largest dairy exporter, said this week. Dairy exports declined 18 percent in the second quarter. Sales of butter, cheese and milk powder make up one-fifth of New Zealand's exports.
Farm production fell 0.6 percent in the second quarter as the drought forced many farmers to stop milking cows. Mining and forestry output also dropped.
Manufacturing increased 1.4 percent, rebounding from a first-quarter slump as farmers sent livestock to slaughter as feed diminished. The construction industry dropped 3.8 percent, led by home building.
The GDP deflator was 4.8 percent in the year ended June 30, the statistics agency said.
To contact the reporter on this story: Tracy Withers in Wellington at [email protected].
Last Updated: September 25, 2008 20:26 EDT
 
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