New Zealand's Economy Contracts 0.3%

New Zealand's economy contracted in the first quarter, putting the nation on the brink of a recession as soaring credit costs damp domestic demand and a drought crimps exports.

Gross domestic product fell 0.3 percent from the fourth quarter, when it gained a revised 0.8 percent, Statistics New Zealand said in Wellington today. That matched the median estimate of 13 economists surveyed by Bloomberg News. The economy expanded 1.9 percent from a year earlier.

Seven economists expect the economy also shrank in the second quarter, pushing New Zealand into its first recession since 1998. New Zealand's dollar fell to a seven-day low as investors bet the contraction will prompt Reserve Bank Governor Alan Bollard to cut the benchmark interest rate from a record- high 8.25 percent by September.

New Zealand's dollar fell to 75.38 U.S. cents at 11:45 a.m. in Wellington from 75.52 cents immediately before the report.

Bollard on June 5 forecast a 0.3 percent first-quarter contraction followed by 0.2 percent growth in the three months to June 30. He said he couldn't rule out a recession.

The central bank Governor, who has kept the benchmark interest rate unchanged since July last year, said it is ``likely'' he will reduce borrowing costs this year because slowing growth will stem inflation.

Adding to signs the economy won't recover quickly, consumer confidence slumped to a 17-year low in the second quarter, and house sales fell in May to a 16-year low.

The first contraction in gross domestic product in two years was led by a slump in consumer spending, home building and exports, the statistics agency said in today's report.

Household spending, which makes up 60 percent of the economy, fell 0.4 percent from the fourth quarter, the first contraction in four years. Purchases of durable items declined 3.4 percent, led mostly by cars, furniture and household appliances. Spending on alcohol, food and other so-called non- durable goods was unchanged.

New Zealanders are cutting back on purchases of cars, computers and appliances as they pay higher interest costs on their mortgages and credit cards. The lending rate on a two-year fixed home loan was 9.6 percent in April compared with 8.8 percent a year earlier.

Spending on new housing fell 5.5 percent in the first quarter, the statistics agency said.

Business investment declined 1.2 percent, led by commercial construction, while spending on plant, machinery and equipment increased. Inventories held by retailers and the distribution industry also rose.

Overseas shipments of goods and services declined 1.8 percent in the quarter as dairy product sales fell. Imports volumes rose 1.2 percent.

Farm production fell 5.6 percent in the first quarter, the biggest decline since 1998, as the drought forced many farmers to stop milking cows. Mining and forestry output also declined. Manufacturing declined 1.2 percent, led by food processing as less milk was supplied to factories. Output from the construction industry slumped 5.2 percent, led by home building.

A second report today showed exports in May rose less than economists expected after dairy sales were the lowest in nine months. The nation's annual trade deficit unexpectedly widened to NZ$4.81 billion ($3.6 billion). Economists expected it would narrow to NZ$4.5 billion.

New Zealand, Bloomberg
6/27/2008 6:43:10 AM