English confident of prospects despite stall in recovery

Finance Minister Bill English yesterday continued to talk up the prospects of an economic recovery despite evidence the recovery stalled in the middle part of this year.

Gross domestic product (GDP) was much weaker than expected in the three months ended September, contracting 0.2%.

In addition, growth in the March quarter was revised lower to 0.1% from 0.2%.

The country missed a double-dip recession by a whisker.

Two quarters of negative economic activity is the official description of a recession.

GDP measures the output produced in an economy during a period.

However, Mr English said the one-off effects of the Canterbury earthquake and snow storms in Southland also showed through in the September quarter.

"Before this result, we had seen five consecutive quarters of growth since coming out of a deep recession. I've said all along that this recovery would be a bit bumpy at times, and that's proved to be the case.

"Having said that, I'm actually quite confident that the economy will build momentum in 2011 and beyond."

Mr English placed his hopes for the economy on declining unemployment, strong export prices and New Zealand's hosting the Rugby World Cup.

It was important to look through the quarter-to-quarter figures and focus on the long-term challenge of building a sustainable recovery on savings and exports rather than borrowing and consumption, he said.

ASB economist Jane Turner said the GDP result was much weaker than the market and the Reserve Bank were expecting.

The weakness was a result of weak housing demand and activity, poor weather conditions and a decline in manufacturing activity.

"We expect that both manufacturing activity and housing construction will recover over the next year. Weather conditions present an ongoing challenge to New Zealand agricultural production."

There remained some signs that underlying demand might not be quite as weak as the figures suggested, she said.

Business confidence had recovered from its mid-year dip, and the strength of capital imports pointed to an increase in business investment.

The strength seen in transport and wholesale activity was not consistent with an economy going sideways, Ms Turner said.

The activity related to the preparation and hosting of the world cup next year was another reason to expect better and brighter things for 2011.

"Nonetheless, with a negative GDP number proving a disappointment ahead of Christmas, the Reserve Bank will certainly be in no hurry to resume lifting the cash rate until it is very confident that the economic recovery has regained traction."

The Reserve Bank was not expected to lift the official cash rate until June next year and rate hikes were expected to be "very gradual", she said.

 

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