Published 24 December 2010

Economic activity declines...

Economic activity fell by 0.2% in the September 2010 quarter, below market expectations of a small rise (Figure 1).  This was the first fall in real GDP since the economy exited recession in the June 2009 quarter and follows growth of only 0.1% in the June 2010 quarter.  While some of the slowing in growth reflects disruptions from the Canterbury earthquake, the economic recovery clearly lost momentum over the middle of 2010 as domestic demand remained subdued and business confidence softened.  Highlighting the slow and patchy nature of the recovery, real GDP still remains 1.8% below its December 2007 peak (Figure 2).

Figure 1: Quarterly Economic Growth

Data table for Figure 1

Figure 2: Quarterley Real GDP

Data table for Figure 2

…led by falls in manufacturing and construction…

Manufacturing activity fell by 1.7% in the September 2010 quarter and was the main contributor to the overall decrease.  Construction activity also fell strongly (down 2.5%), mainly driven by weakness in residential construction although investment in non-residential building also fell.  The decline in residential construction is consistent with the fall in consent approvals over recent months.  The soft housing market also saw real estate & business services fall 0.7% over the quarter as housing turnover remained low.

The primary sector contracted over the September 2010 quarter with agriculture down 1.0% and mining activity down 6.9%.  The fall in agriculture was due to a fall in livestock production, most likely the result of the September storms in Southland.  This was partly offset by a rebound in milk production.

…although activity rose in the wholesale, retail and transportation industries…

Activity in the wholesale trade industry was up by 2.4% over the quarter taking annual growth to 6.9%.  Transport & storage activity also rose strongly (up 3.4%) while retail trade recorded a 0.6% increase over the quarter.  However, much of the increase in retail is likely to be due to households having brought forward purchases as a result of the GST increase on October 1.  As a result, we expect retail activity and consumer spending will continue to remain weak in the December 2010 quarter.

…however, economic growth is expected to pick up over 2011

The economic recovery stalled over the middle of 2010 and activity is expected to remain relatively subdued in the short-term as both households and businesses remain cautious and dry weather conditions affect agriculture production.  However, the outlook for 2011 is more positive with the average prediction in NZIER’s Consensus Forecasts for growth of 3.5% in the year to March 2012.  Strong trading partner growth, high commodity prices, the Rugby World Cup and reconstruction activity from the Canterbury earthquake will support growth over 2011.  A pick up in growth is expected to see the labour market continue to improve slowly, with employment continuing to edge up and the unemployment rate falling below 6.0% in the second half of 2011.