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Sydney, Aug 6, 2008 (ABN Newswire) - New Zealand seems on its way to be the first western economy into recession this year, according to the country's Treasury department.
The New Zealand Treasury yesterday said it believed the economy had contracted for the second successive quarter: if that's the case, it would satisfy the definition of a technical recession.
Other economies are weak: new figures last week showed the Us economy contracted in the December quarter and then rebounded slightly in the March and June quarters, thanks to strong exports. Denmark has had one quarter of recession and Ireland is heading that way, along with the UK and Spain.
But NZ seems to be in the lead of what would be an unwanted victory.
Official economic figures for the June quarter will not be released until next month, but the NZ Treasury released its overview of July economic indicators.
During the March quarter Gross Domestic Product shrank by 0.3%.
The Treasury said yesterday "Following recent data releases, we consider the economy contracted in June 2008, its second consecutive quarterly decrease.
"Inflation is currently high, but should ease in the medium term as a result of continuing weak GDP growth.
"Our view is that the economy contracted for the second consecutive quarter in June," Treasury said.
"Annual average growth in real production GDP in the calendar 2008 year is expected to slow to 0.5% to 0.75%," it said. "While the expenditure measure may even turn negative."
"The decline in business activity is one factor leading us to consider that real GDP fell in June for the second consecutive quarter.
"These results are supported by the National Bank Business Outlook survey which showed firms' activity outlook weakened further in July 2008.
"The net percent of firms now expecting activity to weaken is at levels comparable to the 1991 recession."
"With demand weakening, capacity constraints will ease and inflation will decrease in the medium term.
"With risks of the economy slowing further and CPI inflation expected to fall back within the 1-3% range in the medium term, the Reserve Bank cut the Official Cash Rate by 25 basis points to 8.0%.
The last time New Zealand faced successive quarters of negative growth was more than 10 years ago, between September 1997 and March 1998.
Treasury also said inflation rose to 4% in the year to June, and was expected to peak around 5% in September, due to higher food and fuel prices, and higher non-tradeable inflation. That was the forecast from the Reserve Bank of New Zealand Governor, Dr Alan Bollard when he surprised last month with that cut in the official cash rate to 8.0%, from the 8.25% rate that had been unchanged for two years.
In a radio interview in NZ yesterday, Dr Bollard held out hopes of a further cut or further cuts in rates.
He said he saw the country's presently high inflation rate easing further.
"In a softening economy, people are going to be really hesitant about price increases and things like that, so that's given us enough room to cut," Dr Bollard was reported as saying in an interview with Radio New Zealand today.
"We've got nasty inflation right at the moment," Bollard said. ``We think it will be back in zone. Comfortably? Only just. So does that give us enough room to cut? Given the softness around the economy, then yes."
He was supported by Treasury which forecast:
"Growth is expected to pick up in the December 2008 quarter owing to the combined effects of tax cuts on 1 October 2008, recovery from the drought, high export prices, the weakening New Zealand dollar and more reductions in the OCR."
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