Bloomberg News

New Zealand’s Economy Almost Stalls, Sending Currency Lower

September 21, 2011

(Updates with central bank comment in seventh paragraph.)

Sept. 22 (Bloomberg) -- New Zealand’s economy almost stalled last quarter, sending the local currency to a four-month low and reinforcing the case for central bank Governor Alan Bollard to maintain record-low interest rates until 2012.

Gross domestic product rose 0.1 percent in the three months through June from the previous quarter, less than all but one of 15 forecasts in a Bloomberg News survey, a Statistics New Zealand report showed today in Wellington. The median estimate was for a 0.5 percent gain.

The local dollar slumped as investors bet weaker growth and risks of slowing global demand for New Zealand exports will prompt Bollard to keep the official cash rate at 2.5 percent until next year. The currency has fallen 10 percent from a record last month as a European debt crisis and the downgrade of the U.S. government’s credit rating led investors to reduce bets on a rate rise this year.

“This is a disappointment and suggests more spare capacity in the economy than initially thought,” said Philip Borkin, economist at Goldman Sachs & Partners New Zealand Ltd. in Auckland, who expects rates are on hold until March. “The risks are skewed toward an even further delayed tightening cycle.”

New Zealand’s dollar fell to as low as 79.53 U.S. cents after the data, the lowest level since May 25. It bought 79.67 cents as of 1:10 p.m. in Wellington. On Aug. 1, it reached 88.43 cents, the highest since exchange-rate controls were removed in 1985.

Rate Pause

Bollard on Sept. 15 left the cash rate unchanged for a fourth meeting, and reiterated that eventual increases in borrowing costs will hinge on a decline in global financial risks and a sustained domestic recovery after a Feb. 22 earthquake killed 181 people and demolished businesses, roads and houses in the South Island city of Christchurch.

“We do have a picture where we still do expect to have to push rates up,” Bollard said during a conference in New York yesterday. “However, we don’t think there is any particular rush to do that.”

Nine of 17 economists surveyed by Bloomberg on Sept. 16 predicted rates will be unchanged until at least January. Sixteen expect a rise by March. The chance of a rate increase in March fell to 48 percent from 64 percent yesterday, according to swaps prices from Westpac Banking Corp.

Bollard expected second-quarter growth of 0.6 percent, accelerating to 0.8 percent in the three months through September and 1 percent in the final three months of the year.

Rugby Spending

Aiding consumer spending, about 95,000 foreign fans are attending the Rugby World Cup due to end Oct. 23. New Zealand’s terms of trade, which measure relative export income, are at a 37-year high, Bollard said last week.

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, today said it distributed NZ$10.6 billion ($8.5 billion) to its New Zealand farmer shareholders in the year ended May 31. The company’s earnings and payout are good for the economy, Chairman Henry van der Heyden said on a conference call.

New Zealand’s economic recovery “remains patchy across different sectors,” Finance Minister Bill English said in an e- mailed statement. The nation faces challenges from global financial market volatility and the rising currency is a “headwind” for exporters, he said.

Second-quarter growth was the weakest since a contraction in the third quarter last year. First-quarter growth was revised higher to 0.9 percent from an initially reported 0.8 percent, today’s report showed.

Annual Growth

The economy last quarter grew 1.5 percent from the year- earlier period, less than the 1.7 percent pace estimated by economists.

The production-based measure of GDP last quarter was led higher by farm output, while finance, insurance and business services rose the most in more than six years. Milk and wool production led the increase in farm output. Real estate services, retail spending and accommodation rose.

Construction fell 4.3 percent, led by trade services and residential dwellings, while road and bridge building gained. A 0.1 percent decline in manufacturing was led by machinery, equipment, wood and paper.

Spending on furniture and appliances led a 0.3 percent gain in consumption, even as purchases of food, electricity and other non-durable goods declined, the statistics agency said.

Exports, which make up 30 percent of the economy, declined 0.5 percent, led by machinery and meat shipments, the report showed. Tourist spending in New Zealand dropped. Imports rose 1.7 percent as the air force purchased new aircraft parts.

Government services fell after a first-quarter increase caused by hiring and emergency responses to the earthquake. Transport and communication also declined. Business investment gained 1.3 percent.

--With assistance from Daniel Petrie in Sydney and Phoebe Sedgman in Melbourne. Editors: Brendan Murray, Michael Heath

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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