We expect New Zealand's GDP fell by 1.1 percent in Q4 2008, completing four consecutive declines in economic activity, predict the analysts at Westpac. Q4 is not only on track to be the worst quarter for growth of last year but the worst since 1991. Combined with the mild declines in the first three quarters of 2008, economic activity in Q4 2008 is expected to be down 2.0 percent from the same quarter a year earlier.
The horrible headline figures will be backed up by equally awful details. For the second consecutive quarter, consumers spent less, businesses invested less and we sold less to the rest of the world. Demand is weak right across the private sector. Growth bright spots appear to be limited to more government spending and agriculture, as recovery from last summer's drought continues. Even the 1 percent lift we have penciled in for agriculture is not a given, with the risk that fewer lambs outweigh increased milk flow.
Consumers were cautious in 2008 as falling house and share prices hit their balance sheets and job security faded as unemployment rose. Watching extreme volatility overseas, even if from afar, has added to the nervousness. We expect consumer spending contracted by 0.4 percent in Q4 with purchases of big ticket items hit hardest. Spending on durable goods was likely down 1.2 percent in Q4. A drop in overall spending implies the cash flow benefits from lower fuel prices, interest rate cuts and tax cuts in the fourth quarter were saved.
Weak consumer demand will be reflected in falls in retail and wholesale trade. The knock on effects will also show up in less activity in transport distribution and manufacturing. House and apartment building took another - sharper - leg down in Q4. This will weigh heavily on the construction sector, despite a small rise in non-residential building.
Manufacturing is expected to make the largest negative contribution to growth in Q4, despite an expected increase in dairy and meat processing. Very weak domestic and external demand, the lagged effect of a high New Zealand dollar and intense foreign competition has hit manufacturing sales hard. Broad-based weakness in underlying manufacturing production was amplified by a shutdown at Tiwai Point aluminum smelter during the quarter. We estimate this shutdown will knock around 0.15 percent off Q4 GDP. Less manufacturing production will be reflected in lower electricity generation.
The economic vibe has moved on considerably since the end of last year continuing the rapidly changing landscape in recent times. A hint at the speed of change can be gleaned from the outlook for world growth being slashed by a gob-smacking 4.4 percentage points in the space of six months - a truly remarkable statistic, but a sign of the times.
An outcome for Q4 on our expectation would be a downside surprise to the RBNZ. Risks around our 1.1 percent forecast seem evenly balanced. A weaker starting position for the economy than anticipated by the central bank would put downward pressure on wholesale interest rates and the New Zealand dollar. Confirmation that consumers were saving the increases in cash flow, businesses were hunkering down and exporters were struggling before the full force of the international meltdown hit would certainly argue for easier monetary conditions. The tightening in monetary conditions since the March MPS certainly seems the wrong medicine and in direct contrast to the balance of conditions outlined by the RBNZ.
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