Real GDP growth has now been negative for the fourth quarter running, with a fall in economic activity of 0.9% recorded in the December 2008 quarter.

Similar to last quarter, the fall in production-side GDP was led by the goods-producing industries. The goods producing industries were down 3.6%, driven mainly by a fall in manufacturing activity of 3.8%. Declines within the manufacturing industries were across the board, with eight out of nine industry groupings recording falls. The only manufacturing industry to record a rise was food and beverage manufacturing.

Construction continued its miserable run, with the 4.4% fall in the quarter capping off a year’s worth of contraction.

The primary sector remained our saving grace. Agriculture GDP growth was 4%, following a 6% rise in the September quarter. As expected, this growth was in large part due to the dairy industry.

Services also grew in the quarter, up 0.8%. Growth in finance, insurance and business services GDP was the largest contribution to the rise, up 2.2%. At the same time, wholesale trade fell 4.9%.

This gives us a very lop-sided growth pattern, with the primary and tertiary sectors growing, while the secondary sector (i.e. manufacturing) continued to struggle to register growth.

On an annual basis, GDP for the year increased 0.2%. This brought some initial confusion. We have had four quarters of contractions, yet growth, albeit minor, for the year? Despite the falls, the sum of the four quarters of 2008 is still higher than that of 2007. This arises because the growth rate through 2007 was higher than the declines registered in 2008. In any case, GDP growth for 2008 was effectively flat.

The primary sector showed a rise of 0.9% for the year, with the mining industry (boosted by Maari oil) offsetting falls in agriculture (down 1.2%), fishing, and forestry and logging. We should see improvements in the agriculture annual GDP number this quarter as the poor March 2008 numbers fall out of the calculation.

Manufacturing continued to struggle, with an annual fall of 3.1%, while construction fell by 7.1%. Levels of activity in the wholesale and retail trade sectors were also down for the 2008 year, 2.0% and 1.9% respectively.

Looking at the expenditure side of the equation, the free-fall in the residential investment category continues to dominate. Housing investment spending, in real terms, was down 14.0% for the December 2008 quarter. This follows falls of 7.8% in September, 8.2% in June, as well as falls in the March 2008 and December 2007 quarters.

Declines in real consumer spending seemed to have reduced to a trickle, at 0.0% in the December 2008 quarter. This follows marginal declines recorded over the earlier quarters of 2008.

Real business investment spending remains worryingly under pressure, with a fall of 4.2% in the December 2008 quarter, although less worrying than the 11.7% fall recorded in the previous quarter. Global uncertainty and tighter requirements for credit will continue to make an impact. With many businesses battening down the hatches and moving underground until the storm passes, it will be a while before purchases of capital equipment and machinery move back up the priority list. On an annual basis, however, business investment is still higher than the previous year, up 1.0% given the positive results in early 2008.

The export picture continues to worsen. The 3.3% fall in export volumes in the December 2008 quarter, follows successive declines in the three earlier quarters. For the annual figure, export volumes in 2008 were down 1.7% compared to the 2007 calendar year, with the December quarter some 8.8% below year-earlier levels.

Looking at the trade ratios, export volumes for 2008 accounted for 31.1% of real GDP. This is indeed a notably achievement over the past two decades, with the export ratio being only 23.9% in the 1989 calendar year. Unfortunately, this achievement is blotted when the import side of the equation is noted. Import volumes in 1989 were the equivalent of 20.6% of real GDP, a ratio that has now soared to 38.2%. The fact is New Zealand is now a net importer, and this appears unlikely to change in the near future.

Overall expenditure GDP was down 0.6%, compared with the fall of 0.9% for the headline production approach, something less of a discrepancy than that noted in the previous quarter. This makes it somewhat easier to get a consistent projection when looking ahead.

Our projection for GDP growth in the March 2009 year is for a fall of 1.7%, with expected bad news to continue throughout the first half of 2009. Thereafter, we expect activity to slowly improve, struggling to average 0.5% in the March 2010 year, and approaching 2%pa for the following two March years.

Our projection remains slightly more optimistic in the near term than those of the Treasury and the RBNZ. This is consistent with our less pessimistic view for employment, driven partly by the quick pick up in net migration inflows, and also from our knowledge of on-going regional infrastructure and related projects. In terms of the composition of GDP growth, this results in a noticeably less pessimistic view for private consumption spending.

Indeed, we note that the Treasury forecasts have no less than four consecutive years of negative consumer spending growth (being a total 3% contraction in consumer spending over those four years). This foreshadows a dramatic change in the spending behaviour of New Zealand households. As a comparison, the recession of the 1990s, with significantly higher unemployment, saw consumer spending contract in the three consecutive September years to 1992 by a total of 1.8%.

We believe New Zealand households will not respond as drastically as in the 1990s, especially noting the relative fiscal easing. Consequently, our forecast recovery is more tilted towards a domestic spending bias, compared with either of the official forecasts.

However, over the medium term we are less optimistic of a quick rebound to a 3% growth trajectory. In this context, we are not convinced by the ‘green shoots’ argument and continue to believe the global economy will take some time to return to anything near normal. We also note the reduced capacity of many New Zealand exporters to immediately switch ‘on’ were the exchange rate to move in favour of exports.

Consequently, we are unable to replicate the RBNZ’s forecast surge of 5.6% and 8.1% export growth in the March 2011 and 2012 years. A rebound of this magnitude, following two consecutive years of 4%pa contractions, would indeed be a stunning recovery. Rather, our export forecasts are more muted, with an expansion of 2% forecast for the year to March 2011, followed by 2.9% in the March 2012 year.

 - Reprinted from BERL Forecasts June 2009