WELLINGTON: Interest rates could be set for another drop on signs of a substantial slowdown in the economy. On Thursday Statistics New Zealand revealed that the economy grew by just 0.4 per cent in the three months to June 30, cutting annual growth to 2.4 per cent. Below the 0.6 per cent that the market and Reserve Bank had expected, it followed the 0.2 per cent growth in the first three months of the year.
ASB senior economist Jane Turner, who correctly predicted the 0.4 per cent increase in gross domestic product, said while there were encouraging signs from sectors such as tourism, overall the economy was slowing.
“We’re getting slowing momentum in construction and manufacturing and we need services to essentially pick up the pace and while there are some encouraging signs it just hasn’t been adequate,” Turner said.
On September 10 the Reserve Bank cut the Official Cash Rate by 25 basis points to 2.75 per cent, the third straight cut, and signalled that another cut was likely, probably later this year.
Today’s figures raised the prospect that the cut would come in October, unwinding all of the increases of 2014, which came on signs that growth and inflation were picking up. At the start of the year growth was hit by a drought in the South Island, slowing dairy production, as well as a shutdown at one of New Zealand’s largest oilfields.
While both dairy and oil and gas production picked up in the June quarter, this was offset by a 1.8 per cent fall in the transport, postal and warehousing category. The biggest fall in that category since March 2009, Statistics New Zealand said the drop was mainly due to lower road transport activity.
Turner said the outlook for growth over the next 18 months was also weak. In recent days ASB said it expected that dairy production in the 2015/16 season would be 5 per cent below last year, a much larger fall than that predicted by Fonterra, which expected a 2-3 per cent drop.
“We see the outlook for growth as quite precarious, particularly with the weakening dairy production outlook,” Turner said. The bank expects annual growth to fall to 2 per cent this year and stay at that level throughout 2016.
Westpac chief economist Dominick Stephens said growth had come in significantly below what the financial markets had expected and made the prospect of an October cut to the Official Cash Rate (OCR) by the Reserve Bank more likely.
Trading on forecasting website iPredict suggests there is an 86 per cent chance of a rate cut in October, and around a 30 per cent chance of a recession by the end of 2016. Labour finance spokesman Grant Robertson said the latest figures showed the first half of the year had been “the worst six months for economic growth per capita in over four years”.
The kiwi dollar immediately dropped by about US0.4c after the figures were released, before recovering slightly, to be trading at around US63.5c at 12:30pm. Economists have been marking down growth forecasts in recent months on signs that the Chinese economy is slowing and a major fall in world dairy prices.
