New Zealand Economy Shrank 0.2%

New Zealand's economy contracted last quarter, driving the nation into its first recession in 10 years and adding to the prospect the central bank will cut interest rates to a three-year low next month.

Gross domestic product fell 0.2 percent from the first quarter when it declined 0.3 percent, Statistics New Zealand said in Wellington today. From a year earlier, the economy grew 1 percent.

Reserve Bank Governor Alan Bollard has cut the benchmark interest rate by three quarters of a point to 7.5 percent since July to try to kick-start the economy. Facing a contraction again in the third quarter and fresh turmoil in global financial markets, most economists say Bollard will lower rates by a half- point on Oct. 23 with a fourth reduction likely in December.

Bollard cut the record-high official cash rate in July by a quarter point to 8 percent, his first reduction in five years, when most economists expected no change. He followed on Sept. 11 with a half-point cut to 7.5 percent when all but one analyst forecast a quarter-point change.

Bollard has urged banks to pass on the savings to customers, saying the economy is experiencing a ``marked slowdown led by the household sector.''

The central bank forecast the economy contracted 0.2 percent in the second quarter and will probably shrink again in the three months ended Sept. 30.

Consumer confidence fell to a 17-year low in the second quarter as food prices soared, fuel costs reached a record and home-loan interest rates remained at an all-time high.

The second straight quarterly contraction in gross domestic product was led by a slump in consumer spending, home building and exports, the statistics agency said.

Household spending, which makes up 60 percent of the economy, fell for a second straight quarter, the first successive decline in 16 years.

Purchases of durable items declined 0.7 percent, led by cars. Spending on alcohol, food and other so-called non-durable goods declined 0.8 percent. Spending on health, travel and other services rose.

New Zealanders are buying fewer cars, computers and appliances as they pay higher interest costs on their mortgages and credit cards. A borrower seeking a two-year fixed home loan faced a rate of 9.2 percent in June compared with 8.3 percent two years earlier.

Spending on new housing fell 8.2 percent in the second quarter, the third straight decline, the statistics agency said.

Business investment increased, led by a 16 percent jump in spending on plant, machinery and equipment amid demand from the oil industry. Commercial construction slipped. Inventories held by retailers and the distribution industry rose.

Overseas shipments of goods and services declined 0.2 percent in the quarter as dairy sales dropped. Import volumes rose 3.3 percent led by transport equipment.

Farmers produced 4.3 percent less milk in the year ended June 30 because of a drought, Fonterra Cooperative Group Ltd., the world's largest dairy exporter, said this week. Dairy exports declined 18 percent in the second quarter. Sales of butter, cheese and milk powder make up one-fifth of New Zealand's exports.

Farm production fell 0.6 percent in the second quarter as the drought forced many farmers to stop milking cows. Mining and forestry output also dropped.

Manufacturing increased 1.4 percent, rebounding from a first-quarter slump as farmers sent livestock to slaughter as feed diminished. The construction industry dropped 3.8 percent, led by home building.

The GDP deflator was 4.8 percent in the year ended June 30, the statistics agency said.

New Zealand Economy Shrank 0.2%,
9/25/2008 5:23:39 PM