New Zealand’s Economy Probably Contracted at Slower Pace

June 25 (Bloomberg) -- New Zealand’s economy probably contracted at a slower pace in the first quarter, adding to signs the nation will emerge from the worst recession in more than three decades by the end of this year.

Gross domestic product shrank 0.7 percent in the three months ended March 31 from the previous three months, according to the median estimate of 11 economists surveyed by Bloomberg News. The economy contracted 0.9 percent in the fourth quarter. The GDP report is released at 10:45 a.m. tomorrow in Wellington.

Reserve Bank Governor Alan Bollard said this month the economy, which began contracting in the first quarter of 2008, may start growing in the final three months of this year. The recovery is likely to be “slow and fragile” and interest rates will be kept at a record low until late next year to further stimulate demand, he said.

“The rate of economic contraction is now abating,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington. “While we remain cautious about the underlying vulnerabilities, there is at least some chance of a mild expansion over the second half of 2009.”

Bollard on June 11 forecast the economy contracted 1 percent in the first quarter. The projections were prepared before reports that showed housing construction fell less than expected and export volumes rose, which will limit the size of the contraction, economists say.

Prime Minister John Key this week said he felt the economy performed better than the central bank expected in the first quarter.

Global Conditions

Bollard forecast the economy shrank just 0.3 percent in the three months ending June 30, citing a recovery in global financial conditions and the world economy. Domestically, the housing market has begun recovering from record lows amid reduced interest rates and government spending, he said.

The central bank has cut the official cash rate by 5.75 percentage points since July to a record-low 2.5 percent. Bollard will leave the benchmark unchanged at his next review on July 30, according to all 12 economists surveyed by Bloomberg.

New Zealand’s economy began contracting last year as Bollard raised interest rates to counter a housing boom and consumer spending that was being fanned by excessive borrowing.

The economy then faced “multiple blows” from collapsing world trade and tight credit conditions, the Organization for Economic Cooperation and Development said in a report yesterday.

Business investment slumped, companies began firing workers, exports slowed and tourist arrivals declined. Exports make up about 30 percent of the economy and the tourism industry contributes another 10 percent.

Job Losses

The first-quarter jobless rate rose to 5 percent, the most in six years, and consumer confidence slumped. Retail sales fell by a record 2.9 percent in the three months to March, and will subtract the most from GDP, economists say.

“Spending on anything discretionary, housing related or exposed to tourism contracted sharply,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland.

Warehouse Group Ltd., New Zealand’s biggest discount retailer, said last month sales in the three months to April 26 fell 2.8 percent as the recession slashed demand for office goods and the company shut liquor and fresh-food outlets.

Business confidence slumped to a record low in the first quarter, according to a survey by the New Zealand Institute of Economic Research Inc.

Investment intentions fell to the lowest on record, the Wellington-based institute said.

Exports, Building

While spending and investment decline, net exports contributed to GDP in the quarter and the drop in construction was less than expected, economists said.

Overseas sales of butter, meat and wool increased and imports slumped, the government said on June 10. Housing construction fell 0.4 percent in the first quarter after a 12 percent drop in the preceding three months, according to a June 9 report.

“Construction is likely to be a much smaller drag on GDP, said Tuffley. Still, the weakness in demand for new housing will probably weigh on the economy for some time, he said.

“We expect that residential construction will bottom out over the second half, with house sales and consents recently lifting off lows,” he said. House sales rose 44 percent in May from a year earlier, according to Real Estate Institute figures, after reaching a record low in January. Home-building approvals increased in April.