New Zealand is contracting and could beat the US and UK economies into official recession status.
The Kiwi economy contracted in the first quarter with Gross Domestic Product shrinking 0.3% as high interest rates, rising inflation and falling consumption curtailed activity, aided by a drought that has cut exports of high margin dairy products, the country’s mainstay.
Statistics New Zealand said the economy’s contraction in the March quarter compared to a revised 0.8% rise in the December three months.
Year-on-year growth was 1.9%, down from 3.5% in the 12 months to December. Many economists think the contraction will continue this quarter, although the Reserve Bank thinks there will be some modest growth.
If there’s another fall in growth this quarter, this will confirm the country has fallen into recession.
It will be tough for all those Australian companies operating (indeed dominating) much of the NZ economy. From the big four banks to Fairfax Media, APN News and Media, Harvey Norman, Woolworths, BlueScope Steel, James Hardie and a host of other groups, the fall in consumption activity and in sectors like housing, construction and manufacturing, will directly hit their bottom lines in 2008 results
The contraction (the first in two years) adds to pressure on Reserve Bank Governor Alan Bollard to cut the main official interest rate from a record-high of 8.25% within the next three months.
He has suggested he will cut rates around September-December, even though inflation is forecast to hit 4.7% by then.
The 0.3% contraction is as Bollard forecast at the start of this month. He believes the economy will grow by 0.2% in the quarter which ends today.
NZ consumer confidence has slumped to a 17-year low this quarter, and house sales fell in May to a 16-year low.
Finance Minister Michael Cullen said last week rising fuel and food costs meant the economy is ”facing some quite significant headwinds” and his department also forecast a contraction in the first quarter.
