GDP growth is expected to be much slower that over the coming year. The second earthquake to hit Christchurch, and the crisis faced by Japan, (New Zealand’s fourth-largest trading partner), have knocked out New Zealand’s slim prospects for a faster-paced growth economic growth in 2011. A general gathering of momentum focussed on the Christchurch re-build underpins our forecast for a recovery through calendar 2012.

We have downgraded our GDP growth forecasts for New Zealand. GDP is likely to see a contraction in the year to March 2012, dropping by 0.9%; compared to a 0.4% expansion in the year to March 2011. The economy is set to gain some momentum in the year to March 2013, and push towards higher growth in the year to March 2014. The overall lower growth forecast is based on general uncertainty in early 2011, compounded by domestic and international tragedies, subdued export revenue growth, weak domestic spending, and restrained government expenditure.

Looking at the detail, New Zealand had a slow expansion of production towards the final quarter of 2010. On a year on year basis, GDP was up 1.5% in the year to December 2010. This is more solid than the 2.1% decline in the year to December 2009, but is noticeably lower than the 2.8% growth seen over the 2007 calendar year. Indeed, despite the growth in the latest year, overall economic activity for 2010 (as measured by GDP) was below that of three years earlier.

GDP growth in 2010 fell short of many commentators’ earlier expectations largely due to weak domestic demand. This weak growth performance was well entrenched over the middle of 2010 and preceded the September earthquakes, which exacerbated the already sluggish growth of economy. The economy appears to have lost momentum following premature suggestions of an export-led recovery early this year. The increase in production in most sectors has been weak compared to the December quarter in the previous year. New Zealand has to channel much of its resources to reconstruction and rebuilding damaged infrastructure, and to lift the confidence of the household and business sectors.

On the expenditure side, domestic spending is still weak as households and businesses remain cautious. Growth in consumption spending has been restrained, growing less than half-a-percent in each of the last five quarters. Retail sales values for the December 2010 quarter were flat, down 0.1% compared with the September 2010 quarter. Moreover, consumer confidence slumped to its lowest in the past five quarters, slipping to 108.3 points in the December 2010 from 120.3 points in the September 2009 quarter.

Government expenditure also declined as the government looked to cut costs, in an effort to extricate itself from a credit watch list. Government investment is down 9.6% on a year ago, while consumption growth slipped from 2.2% in the September quarter to 0.3% in the December 2010 quarter. Given these trends and the ballooning fiscal deficit, it is clear that government will not be the driver of any recovery.

With growth in household spending looking less optimistic, much is expected on the business and external sectors of the economy. Business confidence in New Zealand has resumed an upward trend, increasing by 8% in the December quarter of 2010. This boost in the sector was led by the agricultural sector, which has benefitted from soaring global commodity prices of dairy products. But, with the wake of crisis in Japan, a major importer of New Zealand’s cheese, milk and casein, as well as two of tops export earners of New Zealand, forestry and aluminium, we expect export volumes in the next months to wane. In a recent Fonterra online auction, dairy prices fell sharply following the events in Japan. Still, economists are optimistic about long-term outlook for New Zealand’s top export commodities like dairy, meat, logs and timber, aluminium, and wine. Export volumes might fall, but relatively high export prices and stable world demand are likely to hold up export receipts.

The residential buildings aspect is likely to be a positive contributor over the next year as rebuilding efforts take place in Christchurch. Broadly, this effect will add to overall GDP growth over the medium term. However, there are issues raised on the supply-side, particularly on the capacity of the economy to meet the demand for required labour and skill to rebuild a major tourist destination in the country which has an estimated 9 to 10% share to New Zealand’s GDP and employment, respectively. Labour market demand was weak (the number of full-time equivalent employment is up 0.2%), with filled jobs in the construction sector slipping further (down 5.6%) in the year to December 2010.

The forecast for GDP growth suggests that 2011 might not be a rosy and rallying year for the New Zealand economy. Bid for a faster-paced growth depends on a multitude of factors and the economy’s ability to manage the risks to global growth and export prices. The most complex of the factors that are likely to stimulate recovery and expedite growth in New Zealand in the medium –term is its absorption capacity once rehabilitation efforts in Christchurch are underway. This capacity depends on several factors including the availability and quality of the labour force and the required infrastructure, the efficiency at which investments and funds and used, and an over-all institutional and policy environment. The real challenge therefore is how various sectors involved in the whole process can promptly, efficiently and effectively use the resources to get recovery in the right track.