With a thump, the New Zealand economy has come back to the field, slowing sharply in the three months to March as the slide in global dairy prices and local farm incomes started to bite and lower oil prices hit activity.
The news of the sharp slowing in GDP in the first quarter underlines why the Reserve Bank of New Zealand cut interest rates by 0.25% to 3.25% earlier this month, and why another rate cut is in store in the next couple of months.
While New Zealand’s economy continued to expand in the first quarter, growth was the weakest in two years as GDP grew by just 0.2% from December, and a still strong 3.2% over the year to the end of March, according to Statistics NZ.
That was very different to what happened in Australia in the March quarter when growth was 0.9%. But our annual growth rate in the 12 months to March was just 2.3%, thanks to much slower and lower growth for much of 2014. NZ by contrast experienced much stronger growth through last year.
Growth weakens across the ditch
That was well under all forecasts and took markets by surprise. The New Zealand dollar which had been trading close to US70c before the announcement dipped to US69.1c within minutes. The Kiwi currency is back around five-year lows seen in the wake of the RBNZ interest rate cut last week.
On top of the dairy slide (global prices are down 50% and more over the past year or so), lower returns from forestry and mining also hit the economy, thanks to sluggish to lower growth in Australia and China – NZ’s two major trading partners.
“The lower growth reflected a 2.9% fall in primary industries – agriculture, forestry and mining – the largest fall since September 2010,” Statistics New Zealand said in yesterday’s report.
Agricultural activity fell 2.3% in the March quarter on the back of lower milk production in a quarter marked by drought conditions and lower dairy prices.
However, Statistics New Zealand noted oil and gas were also big factors in the lower GDP growth in the quarter. "There was less extraction and exploration, as international prices fall," said national accounts manager Gary Dunnet. Mining activity was down 7.8%.
Forestry production and exports of forestry products were also down, Statistics New Zealand said.
Westpac Bank economists said the worse than expected growth figures sealed the case for the central bank to cut official interest rates again in July.
“We are seriously considering forecasting further OCR cuts beyond July, pending further analysis of this weak GDP data,” Westpac said soon after the GDP announcement yesterday.
They said the figures showed less buoyant domestic demand than expected, so the figures were a “very significant data development”.
But there were some good parts to the report. Household spending rose 0.7% in the quarter, retail trade and accommodation rose 2.4% (thanks to the cricket World Cup and more visitors for the Chinese New Year). But that won’t be repeated over the remainder of this year, so it’s a one time boost.
Growth in the December quarter was trimmed to 0.7%.
