FYI | Mar 23 2009
By Chris Shaw
In the view of Commonwealth Bank New Zealand economist Chris Tennent-Brown data on the Kiwi economy are only going to get worse,. Leading into the release of December quarter GDP data this weeks he expects the release will confirm economic output has undergone its sharpest quarterly contraction since 1991.
Tennent-Brown’s forecast is for GDP to have declined 1.1% in the period, which is a further sharp fall from the 0.4% fall in the September quarter. This will confirm the New Zealand economy was in a relatively mild recession throughout 2008.
If growth for the December quarter declines by his forecast of 1.1% Tennent-Brown notes this means the New Zealand economy has still fared relatively well compared to the rest of the world, as the US, UK and many Asian nations have found the going even tougher over the past year or so.
But he expects New Zealand’s recessionary trend will continue to remain in place through all of 2009, with the pace of annual growth forecast to fall to minus 2.3%. This implies the downturn is getting more severe.
This also fits with Tennent-Brown’s view the recession has moved from what was largely a domestic correction given a drought, a housing market slowdown and a squeeze on disposable incomes to a sudden fall in demand on the back of the shock to international credit markets.
His analysis supports this view as he points out weakness is now broadly based, with manufacturing, construction and transport services to be the greatest contributors to the decline. The retail and wholesale sectors will also drag on the numbers but to a lesser extent, while agriculture is foreast to make a modest positive contribution.
The Reserve Bank of New Zealand’s (RBNZ) medium-term growth forecasts of 0.8% declines in GDP in both the December and March quarters are likely a little on the optimistic side at present in Tennent-Brown’s view, though the recent weak manufacturing sales result suggests the RBNZ is likely to be factoring in a weak outcome for the December quarter.
This leads him to suggest such an outcome is unlikely to change the RBNZ’s stance with respect to interest rates, with 2.5% seen as the lowest level to which the central bank is prepared to cut the cash rate. In timing terms, Tennent-Brown expects 25-basis point cuts in April and June to reach this level, with further significant weakness likely required to cause the RBNZ to cut rates beyond this level in his view.
