BUSINESS LIMITED SEPTEMBER 2008

NEW ZEALAND ECONOMIC OVERVIEW

The New Zealand economy has experienced what has felt like one of the longest winters for some time, but a recent report suggests the bottom has been passed and we can look forward to a quick recovery.

A number of economic factors have resulted in a low point. In the March 2008 quarter real GDP declined by 0.3%, the first negative growth period experienced in New Zealand for two years. The New Zealand Institute of Economic Research’s (NZIER) Quarterly Survey of Business Opinion (QSBO) shows evidence to support their suggestion that we will see further declines in GDP for the June and September quarters.

Private consumption has been affected as a result of the recession with high prices of energy and food, higher interest rates and declining house prices. Retail spending, excluding motor vehicle retailing, decreased by 4.0% over the last quarter, which is a larger drop than usual between the March and June quarters, reflecting the pressure household budgets are under. Perhaps the most indicative measure of retail spending is to look at the year-on-year increase in spending. In recent years the increase in spending, accounting for inflation, has been upwards of 4.5%. Over the last quarter retail spending across New Zealand increased just 2.7%.

 

 

NZIER believe that the recession in New Zealand will be short and shallow with the lowest point being the June 2008 quarter. From here there are a number of factors which should positively influence growth in New Zealand. The NZIER believe that significant further reductions in house prices are unlikely given that owner-occupiers are not likely to be forced to sell and residential investors are generally relatively lightly leveraged so they are able to cope with moderate interest rate increases. Furthermore, property investment has proved to be relatively low-risk compared with finance company and equity deposits.

Private consumption is expected in increase for a number of factors. The worst of the price increases in food and energy appear to have passed. The unemployment rate has increased marginally from 3.7% in March to 3.9% in the June quarter, which is the highest level since March 2006, but still exceptionally low. This is expected to keep growing, but remain at very modest levels. Wage increases are still likely to be relatively high over the next twelve months, which will act as a catalyst for stimulatory activity.

A general election scheduled for late 2008 will lead to a possible expansion in fiscal spending. Tax cuts will be introduced later in the year. The Reserve Bank has begun an easing of monetary policy, with the first official cash rate (OCR) reduction since mid 2003 bringing the rate to 8%. This will help to off-set the increases in commodity prices.

Finally, the decline in the volume of exports should begin to reverse. The decline was resultant of a strong New Zealand dollar and, particularly with our primary sectors, a drought in early 2008. The export sector is expected to recover relatively quickly due to the weakening New Zealand dollar and an improvement in climate conditions.