27 Sep 2008

NZ officially in a recession

3:44 pm on 27 September 2008

New Zealand is officially in a recession for the first time since 1997.

Statistics New Zealand figures issued on Friday confirm that the economy contracted for two successive quarters - the technical definition of a recession.

The economy contracted by 0.2% in the June quarter. Most economists expected it to fall by 0.4%. In the March quarter, the economy shrank 0.3%.

Drought-stricken farmers put more stock through meat plants than expected, causing activity in the sector to jump 1.4%.

However, economists say this, along with a large build-up in inventories and weak retail sales, suggest manufacturing may act as a drag on the economy later this year.

ANZ National Bank has cut its forecast for marginal positive growth in the current quarter and now expects the economy will once again contract.

Finance Minister Michael Cullen says the recession is expected to last three quarters of the year and on Friday confirmed the Government's books are not looking good.

Dr Cullen says it is almost certain that economic activity fell in the nine months of 2008 to date. However, he expects tax cuts coming into effect on 1 October and lower petrol prices will help boost economic growth in the last three months of the year.

The last time New Zealand was in recession was the second half of 1997 after the Asian currency crisis and drought. It continued into a third quarter of negative growth in the first three months of 1998.

Eight out of nine economists polled by Radio New Zealand expect the current recession to follow a similar timeline and last three quarters.

A pre-election fiscal and economic update will be issued in October and Dr Cullen says it will show the Government faces substantial cash deficits over the next four years, meaning it will have to borrow more heavily.

OCR cuts expected

Deutsche Bank chief economist Darren Gibbs expects more cuts in the Official Cash Rate.

He says the crisis on financial markets will see the Reserve Bank cut interest rates by another half a percentage point, before easing and cutting another 25 basis points in December.

The OCR is currently 7.5%. It was reduced from 8% on 11 September.