Thursday, September 27, 2007

New Zealand Economic Growth Slows Less Than Expected (Update1)

By Tracy Withers

Sept. 28 (Bloomberg) -- New Zealand's economic growth slowed less than expected in the second quarter, signaling the central bank is unlikely to cut interest rates from a record.

Gross domestic product increased 0.7 percent in the three months ended June 30 from the first quarter when the economy expanded a revised 1.2 percent, Statistics New Zealand said in Wellington today. The median estimate of 11 economists surveyed by Bloomberg News was for 0.5 percent growth.

Reserve Bank of New Zealand Governor Alan Bollard raised the benchmark interest rate four times between March and July to a record 8.25 percent to slow domestic demand and inflation. Stronger-than-expected growth in the first half of the year suggests he has little scope to cut borrowing costs, buoying the New Zealand dollar.

``The strain on resources will bring no comfort to the Reserve Bank,'' Doug Steel, an economist at Westpac Banking Corp. in Wellington, said before the report was released. Rising growth ``would certainly add to inflation worries and see a reduction in the probability of interest-rate cuts.''

New Zealand's dollar rose to 75.38 at 10:50 a.m. in Wellington from 75.09 cents immediately before the report.

Bollard will keep the official cash rate unchanged for the remainder of this year, according to all 13 economists in a second Bloomberg survey. Just four predict a cut before June 30.

Annual Growth

Steel says Bollard won't cut the rate cut until 2009, noting the Reserve Bank expects inflation will accelerate to 3 percent this year. Bollard is required to keep inflation between 1 percent and 3 percent. Consumer prices rose 2 percent in the year ended June 30.

From a year earlier, the economy expanded 3.2 percent. Annual- average growth was 2.2 percent from 1.7 percent in March. Economists forecast 2.1 percent.

Economic expansion will probably accelerate this year. Bollard expects 2.9 percent annual average growth in the year ending March 31, according to his latest forecasts. He predicted 0.5 percent in the second quarter.

Economists aren't as optimistic. Growth will probably be 2.4 percent in the year ending March 31, 2008, before slowing to 2 percent a year later, according to the average estimate of 10 economists surveyed by the New Zealand Institute of Economic Research Inc.

Growth could be as little as 2 percent over the next year, ANZ National Bank Ltd. said yesterday, basing its forecast on its monthly measure of business confidence. More companies expect profits will fall and fewer plan to hire workers, according to the survey of 423 firms.

Consumer Spending

The expenditure-based measure of GDP rose 0.8 percent as a 1.5 percent increase in domestic demand was offset by net exports, which subtracted from growth, the statistics agency said today.

Buoying growth, investment in new housing surged 3.8 percent. Government spending also increased. Inventories rose, adding to growth.

Household spending, which makes up 60 percent of the economy, gained 0.6 percent from the first quarter when it rose 2.1 percent.

Hallenstein Glasson Ltd., the third-biggest publicly traded retailer, said on Sept. 14 that full-year profit fell. The performance in New Zealand ``was challenging, with rising interest costs finally beginning to dampen consumer spending,'' Chairman Warren Bell said in a statement.

Skills Shortage

Spending on alcohol, food and other so-called non-durable goods rose 1.4 percent in the quarter. Purchases of cars, appliances and durable items gained 0.4 percent.

On Sept. 13, Bollard said there were signs that higher borrowing costs are damping domestic spending. Still, rising wages, government spending and record payouts to dairy farmers will prevent spending stalling, analysts said.

New Zealand's jobless rate fell to a record 3.6 percent in the second quarter as companies added more than twice the number of workers forecast by economists.

A skills shortage sparked a record 3.2 percent wage increase for non government workers in the second quarter from a year earlier.

Fonterra Cooperative Group Ltd., the world's biggest dairy exporter, has raised its milk payment to 10,900 farmers by 43 percent, citing record prices. That will add NZ$2.6 billion ($1.9 billion) to farm incomes this year.

Crimping growth, imports rose and business investment fell 2.9 percent from the first quarter, the agency said. Purchases of plant and machinery declined. The purchase of a navy ship buoyed investment in transport equipment.

Service Industries

Imports rose 2.5 percent, buoyed by the navy ship and spending also increased on overseas travel, which is treated as an import of services. Consumption goods imports fell 3.4 percent.

Exports of goods and services increased 0.5 percent in the quarter, with meat and dairy volumes declining. Tourist spending helped exports of services increase.

Service industries including finance and business services, transport and communications contributed most of the growth in the quarter, the agency said. Production from those industries increased 0.9 percent. The output from farmers and other primary industries rose 0.2 percent, while production from manufacturers and other goods producers dropped 0.1 percent.

Real estate sales and lending by financial institutions contributed most to output from the services industries.

Production from primary industries rose, buoyed by output from the nation's oil and gas fields. Farm production fell. Among goods- producing industries, manufacturing increased while construction declined.

The implicit price deflator gained 3.1 percent for the year ended June 30, the agency said.

Last Updated: September 27, 2007 19:02 EDT

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